Case F75

Judges:
JL Burke Ch

RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 22 November 1974.

J.L. Burke (Chairman); R.E. O'Neill and C.F. Fairleigh Q.C. (Members): During the year ended 30 June 1971 the objector derived income from a partnership with her husband, Ronald Grafton Sarina, and the matters which are the subject of the present reference to the Board arise from disallowances by the Commissioner of claims for deduction in both the partnership return and the personal return of the objector. The claims and disallowances are summarized hereunder-


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Partnership R.G. and D.M. Sarina        Claimed     Allowed    Disallowed

 Casual labour              $240)
 Bulldozing                   82)
 Bricks                       58)
 Materials                    32)        $455            -        $455
 Posts - concrete             18)
         wood                 25)

 Development fee                           10            -          10

 Depreciation -
   Tractor                   $32)
   Nursery building           51)         212            -         212
   Water main                129)

 Electricity                              138          $33         105
 Telephone                                 82           41          41
 Fire insurance on residence               88            -          88
 Television and wireless licence           20            -          20
 Dog upkeep                               100           50          50
    
Individual -- D.M. Sarina        Claimed       Allowed     Disallowed

Sundry items disallowed as
capital expenditure -
  Cost of labour -
  building of cages          $300)
  Top soil                     20)
  Cement for car track        133)     $671              -        $671
  Labour for car track         30)
  Labour and material -
  erecting kiosk              188)

Depreciation                            174            $94          80
Loss of birds, guinea pigs,
 snakes and lizards                     254              -         254
Out-of-pocket expenses                   50              -          50
Cost of getting deeds                   180              -         180
Loss by theft                           141              -         141
    

2. Section 190 of the Income Tax Assessment Act is in the following terms -

``190. Upon every such reference or appeal

  • (a) the taxpayer shall be limited to the grounds stated in his objection; and
  • (b) the burden of proving that the assessment is excessive shall lie upon the taxpayer.''

3. In our opinion the objection lodged is wide enough to allow consideration of all the claims itemized above.

4. Apart from the disputed claims for depreciation ($212) and for ``car expenses'' ($449) the deductibility of the various items depends on whether or not they come within the positive limbs of sec. 51(1) and are outside the excluding words of that provision. Section 51(1) of the Income Tax Assessment Act reads -


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``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

5. The partnership return for the year ended 30 June 1971 disclosed the following income -

``Income from Lion Park               8,320.00
  Income fron Nursery and Golf
    Course at most say                   15.00
                                     ---------
                                    $8,335.00
      

6. The partnership owned the freehold of the 122 acres of land on which the Lion Park was conducted at Warragamba and as the lessees bore all the expenses connected with the running of the park none of the disallowed items relates to the rental income.

7. In addition to the Lion Park the partnership owned 12 acres of land on which it conducted the nursery, a nine-hole golf course and a mini-putting course. As from 8 May 1971 the objector conducted an amusement park on portion of the said 12 acres.

8. The development of the 12 acre area by the partnership began in 1968. The nursery building had a tin roof and wooden sides half way up with protective green shade-cloth. It housed about $1,000 worth of plants but sales were poor, according to the evidence, partly because of competition and partly because of ill-health of the partners. The nursery was indicated by an appropriate road sign on the street frontage.

9. The holes of the golf course were 75 to 105 yards in length and had greens with sand centres. The objector's husband, R.G. Sarina, a member of the Professional Golfers' Association of N.S.W., used the course and the grassed putting area for practice but also made the facilities available to the public for 30 cents a round with a club and ball provided. As the gross returns indicate, the course was poorly patronized during the income year 1970/1971.

10. The partners had in mind from the inception that they would turn the 12 acres into one composite amusement area and, to this end, they bought a cottage from the Main Roads Board and erected it as a kiosk on the area to serve the nursery, the golf course and the proposed amusement park. Consent for the erection of the cottage was obtained towards the end of the calendar year 1970.

11. We turn now to consider the items in detail -

PARTNERSHIP CLAIMS

Casual labour

Two-thirds of the hired labour involved in this expenditure was employed in erecting the kiosk building and dog and bird cages for the amusement area. The balance of the labour was for general cleaning up around the area. We allow a deduction of $80 in respect of this item but the disallowance of the balance of the expenditure is confirmed as being expenditure of a capital nature.

Bulldozing

The bulldozing was done in connexion with the erection of the kiosk and other developmental work such as the making of paths. The expenditure was of a capital nature and has been correctly disallowed.

Bricks, materials and posts

The items were bought and used in connexion with the erection of the kiosk and for a guard-fence around part of the amusement area. The disallowance is confirmed as being of a capital nature.

Development fee

This fee was paid to the Council for consent to erect the kiosk. It has been correctly disallowed as being of a capital nature.

Depreciation - tractor

The depreciation of $32 claimed by the partnership is at the rate of 20 per centum provided for in sec. 57AA of the Assessment Act. Whilst it is clear that what was being carried on on the subject property did not amount to an agricultural or pastoral pursuit for the purposes of the section, the evidence establishes that the tractor was in fact used for


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the purpose of mowing the area, including the golf course, and qualifies as plant owned and used for the purpose of producing assessable income. (The Commissioner has allowed a deduction of $27 being the cost of sand used for the golf course.) We would allow a deduction of $36 based on a rate of 22½ per centum as prescribed in Income Tax Order No. 1217.

Depreciation - nursery building

Buildings are ordinarily not ``plant'' for the purposes of depreciation but the term is extended in sec. 54 to include structural improvements on land used for the purposes of agricultural or pastoral pursuits. As the nursery building does not so qualify no deduction is allowable under sec. 54 or sec. 57AA of the Act.

Depreciation - water service

The written-down expenditure on which this deduction is based relates to the amount paid by the partnership to the Water Board (on a half and half basis with the lessees of the Lion Park) for the laying of a main from Warragamba to supply water to the properties. The main is not on the partnership property and not being owned by it does not qualify for depreciation under sec. 54 of the Act.

Electricity and telephone

The electricity used was, on the evidence, mainly, if not wholly, for domestic consumption. In evidence it was admitted that the telephone was used for private as well as for business purposes. The partnership has not established its entitlement to any greater deductions than those allowed by the Commissioner under these heads of expenditure.

Fire insurance on residence

Television and wireless licence

There is nothing in the evidence which would take either of these items out of the category of ``private or domestic expenditure'' and their disallowance is directed in terms of sec. 51(1) of the Act.

Dog upkeep

The watch dog which was also a house dog guarded the residence as well as the business enterprise. As with the expenditure on electricity and telephone, the partnership has not established its entitlement to any greater deduction than $50 allowed by the Commissioner.

CLAIMS IN PERSONAL RETURN

Building of cages, top soil, cement for car track, labour for car track, costs of erecting kiosk

All the above expenditure was associated with the setting up of the amusement park which commenced operations in the objector's proprietorship on 8 May 1971, the takings to 30 June 1971 being $45.60. The outgoings are clearly of a capital nature and have been correctly disallowed in terms of sec. 51(1).

Depreciation

The items on which depreciation has been claimed are merry-go-round, loud speaker, chair-o-plane, motor train, ferris wheel, platform for ferris wheel, tower and battery cars. The objector in her return claimed depreciation at a rate of 20 per centum but the Commissioner has allowed 11¼ per centum on the diminishing value method being the rate prescribed for this type of amusement park equipment in Income Tax Order No. 1217. The objector has not established her entitlement to depreciation at a rate greater than that allowed by the Commissioner.

Loss of birds, guinea pigs, snakes and lizards

After referring the reference to the Board the Commissioner issued an amended assessment allowing the above claim. The matter is no longer in issue.

Out-of-pocket expenses

The objector's husband, who prepared her return, said the outgoing could have been for personal items such as make-up. The objector said the expenditure could have been for such things as veterinary fees for the dogs or fertilizer for the nursery.

The evidence is altogether too sketchy to make a positive finding that the whole or any part of the $50 claimed is allowable and the disallowance is confirmed.

Cost of getting deeds

The amount of $180 claimed represents two items of $90 paid to the objector's solicitor in connexion with the purchase of two properties


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acquired for rent producing purposes. The outgoings are of a capital nature and have been correctly disallowed.

Loss by theft

During the year of income 1970/1971 the objector held six rent producing properties from which she derived gross rents of $3,679 (approximately $71 per week). The objector collected the rents in cash, apparently weekly, and on a particular Monday morning she had in her bank book $141 rent money ready to bank. The money represented a fortnight's rents as it was her practice to bank every two weeks. The money disappeared from the objector's car during a temporary absence on her way to the bank but she was unable to say whether it was lost or stolen. She said in evidence that the notes which were lost would have been those which had been paid to her as rent.

In our opinion when the rents were received by the objector the income had been derived by her and the loss or theft of the moneys representing the rents, some of which had been held by her for over a week, cannot be regarded as a loss or outgoing incurred in gaining or producing the rental income. The loss of rents received but not banked is not, in the accepted sense, a characteristic incident of the derivation of rental income and in this regard is to be contrasted with the cash holdings of a bookmaker (Case 12,
13 C.T.B.R. (Old Series) 69) and the cash receipts of a retail store (
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344).

The Commissioner's decision to disallow the loss is accordingly upheld.

Late lodgment penalty

The objection contained a ground relating to the penalty imposed pursuant to sec. 226(1) for the late furnishing of the 1970/1971 return. After remission by the Commissioner the penalty stood at $31.10 and as this amount is less than the amount calculated pursuant to sec. 193(2)(a) the Board has no power to further review the penalty.

12. For the foregoing reasons we uphold the objector's claims to the extent of allowing the partnership a deduction of $80 for casual labour and $36 for depreciation of a tractor. By consent the objector is allowed a deduction of $254 for loss of animals but in all other respects the Commissioner's decision on the objection is upheld.

Claims allowed in part


 

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