Case N57

Judges:
HP Stevens Ch
JR Harrowell M
BR Pape M

Court:
No. 1 Board of Review

Judgment date: 20 July 1981.

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H.P. Stevens (Chairman)

The questions at issue in this reference are whether the taxpayer is entitled to a deduction -

• (a) in terms of sec. 69 for an amount of $800 paid to a firm of tax agents during the year ended 30 June 1975; and
• (b) under sec. 51(1) in respect of telephone expenses for the years ended 30 June 1975 and 1976.

2. Section 69(1) provides for a deduction in respect of ``expenditure incurred by the taxpayer in the year of income for the preparation by a registered tax agent of a return required by or under this Act to be furnished to the Commissioner in respect of income of the taxpayer''. There is no dispute that $800 was paid to a firm of registered tax agents and the matter argued was whether it was in respect of the preparation ``of a return required by or under this Act''.

3. For some years the taxpayer had been employed by a club. The Commissioner was apparently not satisfied with returns of income lodged by the taxpayer during this period and an officer visited the taxpayer at a subsequent place of employment. Arising out of this visit (which was not appreciated by the taxpayer) the officer was requested to ``send me a registered letter from the Deputy Commissioner''. A letter dated 4 June 1973 was later received.

4. This letter advised the taxpayer that ``an investigation of your income tax affairs has been commenced'' and requested, inter alia -

• (i) a statement of assets and liabilities as at 30 June each year 1967 to 1972 inclusive (an appropriate form to be filled in was attached);
• (ii) lists showing dates of acquisition, etc. of assets and of any receipts of a non-taxable nature; and

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• (iii) a complete statement of cost of living and personal expenditure for each year ended 30 June 1968 to 1972 inclusive (another appropriate form was attached).

After receiving the letter the taxpayer was advised to contact a particular firm of tax agents and did so. He gave the letter to the partners and asked that they attend to it for him. Both partners A and B were present at this initial interview and A, who gave evidence, said they were asked ``to act in his best interests and to prepare whatever was necessary for the Commissioner in his interests to give this information so that he could resolve himself of any liabilities with the Commissioner''. Subsequent to this initial interview partner B was the person who had the handling of the matter.

5. After the engagement of the firm the departmental officer visited their office on numerous occasions and was given information relating to the requested details progressively as it came to hand (e.g. bank balances, etc.) - he in turn gave them information that they had been unable to obtain. His last visit was on 17 December 1974 when he attended with ``his own workings''. On that occasion the officer looked at handwritten schedules prepared by B (a person with substantial experience in investigation procedures) and said ``the only difference I have are these omitted superannuation figures''. B then added those figures in pencil - thereby adjusting some final results of his own - and handed the altered handwritten schedules to the officer.

6. The papers handed over fell into three separate categories. One an analysis of cheque butts into, inter alia, concessionals, capital, sundries, living expenses and remarks. Another a statement of assets and liabilities as at 30 June 1968 to 1972 inclusive. The third commenced by listing the respective assets and liabilities totals to show the variation for each year - to this variation the cost of living and other private expenditure for each year was added whilst non-taxable receipts for each year were subtracted. The resulting figure for each year 1969 to 1972 inclusive was termed Notional Income and was compared with the taxable incomes returned to show ``Shortages'' (it was to the respective shortage figures that the omitted superannuation amounts were added). The third also contained a note that due to the lack of records, etc. the taxpayer had agreed ``to have the sum of $1,300 added to his income for that year''.

7. Counsel for the taxpayer in address contended that the above papers (or schedules) represent the equivalent of a return of income - the calculated Notional Income, if adjusted by the superannuation amounts, corresponding to returned taxable incomes. It was also contended that, despite what was originally requested by the Deputy Commissioner, the departmental officer requested B to prepare the information in that form. This might be the appropriate place of refer thereto.

8. As indicated above only A gave evidence - not B - and there is no testimony relating to any specific conversations between B and the departmental officer. A was certainly not requested by the officer to prepare anything other than what was asked for in the Deputy Commissioner's letter and there is nothing to support a finding that B was treated differently. Counsel has suggested that despite this we should draw an inference that this was done. I am not prepared to do so. A admitted B had previous experience in preparing this type of schedule - described by A in his testimony as a ``return'' - and said ``it is the practice of our firm to prepare the return to the fullest to this stage and lodge them in all investigations that we are asked to act upon''. Accordingly, if I were to draw any inference, it would be that their preparation has nothing to do with any request for such from the Commissioner. From their partner's experience they would know that, if an investigation is being carried out on an Assets Betterment Basis, they will need (in their client's interest) to have independently done the same exercise as the Commissioner - so that the departmental officer's resulting final figures can be agreed before the issue of any amended assessments (as here) or in order to be satisfied as to the correctness or otherwise (and, if considered incorrect, in what respects) of amended assessments that are issued subsequent to the lodgment of the requested details.

9. It is unfortunate that B was not called to give evidence, for counsel on behalf of the taxpayer said in his opening that this issue was ``in the nature of a test case'' there being ``a number of other cases which are being

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dealt with by (the) firm wherein a similar claim is in dispute'' - no doubt because of the practice referred to above. In addition in address he said, in reply to a question as to when ``does a request for information that would be regarded purely and simply as a request for information become a request for a return'', that ``it must be a question of fact and it would depend upon the circumstances''. However, he later correctly said that ``every case must stand or fall on its own facts'' and, whilst regretting possible deficiencies, it is upon the evidence actually placed before the Board that this case must be decided.

10. Returning to the facts, the next the agents heard was when notices of amended assessments for the years ended 30 June 1968, 1969 and 1970 dated 7 April 1975 were addressed to the taxpayer care-of B. These amended assessments adjusted the taxable incomes previously assessed by including $1,300, $2,227 and $2,675. Those amounts tallied with the agreed $1,300 (para. 6) and the calculated shortages as adjusted by the superannuation figures (para. 5/6) whilst the adjustment sheet issued with the notices of amended assessment contained the notation ``Other income now included in accordance with the schedules furnished by you''.

11. The work carried out was costed by the firm in their records as $1,595 and two payments of $400 were received on 30 August 1974 and 2 December 1974. No account for either $800 or $1,595 was issued and the balance has since been written off. The amount of $800 paid is the sum claimed in terms of sec. 69.

12. As I understood counsel's first submission it was that, in terms of sec. 162, the Commissioner had required the taxpayer to furnish a further return (those initially lodged being the ones required in terms of sec. 161), that, in terms of reg. 11A, it is open to the Commissioner to vary the normal form of return and that the required further return was constituted by the schedules handed to the officer. I reject the contention that the schedules provided were what the departmental officer requested (para. 8) and likewise were what the Commissioner required. However, counsel did not consider such a finding would be fatal to his submission. He said:

``It is not necessary for my submission to rely on sec. 162. All I have got to show is that the documents furnished were returns and that those returns were paid for, the payment was made to a registered tax agent. If I establish that then the taxpayer is entitled to a deduction in terms of sec. 69. So the question in issue is whether or not those documents can be called a return.''

13. I cannot accept this somewhat simplistic approach for it ignores a basic requirement of sec. 69, i.e. that it be a return ``required by or under this Act to be furnished to the Commissioner''. Once sec. 162 is abandoned what is it that requires a return to be furnished? It seems a reasonable assumption that the authority for the letter issued (para. 3/4) is to be found in sec. 264 - for some reason it was decided to investigate the taxpayer's affairs, information was requested from him whilst apparently independent enquiries of others were also being made (para. 5). Although counsel said he ``would not seek to argue that a requisition made in terms of sec. 264 would constitute a return as contemplated by sec. 69'', he ``would say that in every case it is a question of fact and on the facts of this case... having regard to the way that the matter was initiated and the sort of problem that was in issue the documents rendered can only fairly be described as a return''.

14. Even with the assistance of the dictionary meanings of the word ``return'' that were referred to and even, for argument's sake, accepting that the schedules furnished (by yielding Notional Incomes equivalent to Taxable Incomes as per a standard return form) could be described as returns, I am unable to accept that they are returns required in terms of sec. 69. In my view a request for information cannot be elevated to the status of a required return by a firm of tax agents furnishing voluntarily more than has been requested.

15. It follows that I would not allow the sum of $800 as a deduction in terms of sec. 69.

16. Turning now to the second issue, i.e. the allowability of telephone expenses, the claims made in the respective returns were $130 ( ⅔ of $195) and $213 ( ⅔ of $319) of which the Commissioner allowed only $70

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and $56 respectively. The basis of the Commissioner's allowance of those amounts was not given to the Board but from his representative's submissions viz.:

• (a) the cost of renting a telephone installed in a taxpayer's home has the essential character of a domestic expense;
• (b) alternatively, even if it did not have that character, the cost is capable of apportionment on a respective usage basis;
• (c) the cost of specific calls made in the course of his employment as a car salesman was allowable; and
• (d) the amounts allowed adequately allow for any calls made,

it would seem that the amounts allowed were in respect of calls only.

17. Copies of the telephone accounts for October 1974, April 1975, October 1975 and April 1976 were tendered and these give the following break up:

                                       1975            1976

                                     $       $       $      $

      Metered calls to October     38.50

      Metered calls to April       75.66   114.16  125.55  209.40

                                   -----           ------

      Rent in advance to May       32.00            38.50

      Rent in advance to November  43.42    75.42   38.50    77.00

                                   -----  -------  ------  -------

                                          $189.58          $286.40

                                          -------          -------
      

It was estimated that for 1975 calls totalled 1,902 (520 private) and for 1976 2,714 (780 private). On the basis of the above the taxpayer's counsel submitted the following allowability (in principle):

                                1975        1976

                                  $           $

      Proportion of metered

         calls                  83.33       150.77

      Rent                      75.42        77.00

                              -------       -------

                              $158.75       $222.77

                              -------       -------
      

Both amounts exceed those claimed in the returns and objections and it was submitted that these amounts, i.e. $130 and $213 should be allowed in full.

18. It will be noted that the estimated proportions of calls exceed the amounts regarded as adequate by the Commissioner. Is there any sufficient reason not to accept those proportions? I do not think so. The evidence was not as precise as it might have been but it was not discredited in cross-examination whilst an explanation was given for the 1976 number of calls being higher despite there not being a full year involved. It follows I would allow the submitted calls figures of $83.33 and $150.77.

19. In relation to the rental position it can initially be said that in April 1976 the taxpayer was no longer employed as a car salesman (or any other position where a phone was required for that employment) and the rent in advance to November 1976 must be excluded regardless of the position for the other rental. Is the remainder of the rent allowable or not? I have not found this question easy to resolve.

20. Rightly or wrongly I have consistently endeavoured to apply as a test ``the essential character of the particular expenditure concerned'' (e.g. Case K2,
78 ATC 13 at p. 14) and the decisions in
F.C. of T. v. Forsyth 81 ATC 4157 and
Handley v. F.C. of T. 81 ATC 4165 support this practice. However, I find some difficulty in accepting in all situations the Commissioner's submission that there is a real analogy to be drawn ``between the rent charged for the supply of the telephone service to the taxpayer's home and other domestic service charges such as council and water rates''. Admittedly a telephone once connected is also ``available for the enjoyment of all the family'' but, unlike council and water rates, its connection is not (like a water supply) something automatic and necessary for the enjoyment of a house as a home. Under various regulations a water supply is essential to the enjoyment of the home for, without it, occupation is not permissible. The same cannot be said of a telephone. One must, in my view, look to the reason, or reasons, for

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its connection. If it is for an appropriate one then the domestic criterion will not be satisfied although, for quantum purposes, there may still be a usage apportionment to be considered.

21. The facts of this case show that it is not one of a person who had a telephone connected only because it was a condition (express or implied) of his contract of employment that he do so and who had it disconnected immediately he left that position. Here the telephone had been connected for some time before the taxpayer commenced employment as a car salesman and it was not disconnected when he ceased work as a car salesman in March 1976 (in fact it would seem it was finally ``cut off'' in about 1980 for non-payment of account - such account only being cleared when the home was later sold). When asked why it was not disconnected the taxpayer, who had a wife and three children (born in 1956, 1959 and 1968 respectively), said ``the children would have choked me''. It would also appear from the schedules referred to earlier that during the 1971 year of income the taxpayer's wife opened a shop and this could have been another reason for the continuation of the connection - this aspect was not raised at the hearing only becoming apparent in the course of an examination of those schedules for the purpose of considering the previous issue. In addition to not working as a salesman after March 1976 the taxpayer had earlier that year been unemployed so that he was in the ``car industry'' for only 7 ½ months of the 1976 year.

22. Having regard to the overall situation, I am not satisfied that this is a case where the ``essential character'' test is met. In my view the telephone, not initially connected in relation to his work as a car salesman, did not become transmogrified or suffer a transmutation, upon the taxpayer commencing such work. Its very retention after he ceased such work supports that view. Although there was some evidence of talk redisconnecting the telephone but for his work as a car salesman this was, to say the least, imprecise both as to content and timing.

23. This conclusion leaves then to be answered the question of whether an apportionment is possible. The Commissioner's representative submitted (as per para. 16) that, if its essential character were other than ``domestic'', an apportionment was possible but not if it had ``the essential character of a domestic expense''. I accept this in relation to items such as council and normal water rates which remain unchanged irrespective of usage and in view of para. 22, this is sufficient to dispose of the telephone rental claim, i.e. for that portion within the employment period.

24. For the above reasons I uphold the Commissioner's decision on the objections in relation to the $800 accountancy fees and rental proportion of the telephone claims. I would, however, allow amounts in respect of telephone calls as per para. 18. Assessments for 1975 and 1976 to be amended to allow additional amounts of $13 ($83-$70) and $95 ($151-$56) respectively.

25. Since writing the above I have had the opportunity to read the reasons of my colleague Mr. Harrowell and I would refer to para. 12-15 thereof. In this reference there was no issue (and therefore no argument) as to whether the word ``preparation'' covers, in principle, not only ``the cost of initial preparation and lodgment by a registered tax agent but also includes his subsequent costs covering work done by him to enable that return at least to be assessed by the Commissioner''. Accordingly, since an answer is not necessary for a decision in the present case, I reserve my opinion thereon until such time as it does actually arise.