Federal Commissioner of Taxation v. Kowal.

Judges:
GN Williams J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 16 December 1983.

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G.N. Williams J.

The respondent, Leon Kowal, included in his income tax return for the year ended 30 June 1979 the sum of $165 as income from rental of premises at 14 Honey Street, Toowoomba, from 10 November 1978 to 30 June 1979, and he also claimed as a deduction $1,652 being outgoings in connection with earning that income. In each instance the figures represented one-half of the totals because the property was owned jointly by the respondent and his wife. The respondent's return also included income received and outgoings paid in respect of another house property in Townsville jointly owned by himself and his wife. The Commissioner's original assessment issued 2 October 1979 and, whilst it substantially allowed the respondent's claims in respect of the Townsville property, it disallowed the claim that interest on borrowed funds and telephone expenses were outgoings in connection with the income earned from the Toowoomba property. An amount in respect of valuation fees was allowed as a deduction under sec. 67 of the Income Tax Assessment Act as amended. The assessment was made on the basis that the rental received formed part of the respondent's taxable income. The respondent lodged an objection dated 8 October 1979, in which (so far as is relevant) he contended that the amounts claimed as deductions, being interest on borrowed funds and telephone expenses, should have been allowed, and that a higher amount should have been allowed as a deduction under sec. 67. The Commissioner issued an amended assessment on 14 February 1980, in which the amount of $165 was subtracted from the taxpayer's assessable income, and all amounts claimed as deductions against income from the Toowoomba property were disallowed. (Some adjustments, not relevant for present purposes, were made in the respondent's favour.) In making that amended assessment the Commissioner used an incorrect figure in the calculation (he apparently confused the amount for rates payable on the Townsville property with the amount for rates payable on the Toowoomba property) and that error was corrected by a further amended assessment dated 14 August 1980.

The respondent appealed to the Taxation Board of Review which heard the matter on 10

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September 1980 [Case M87,
80 ATC 624]. On 19 November 1980 the Board handed down a decision in favour of the respondent. Two members of the Board determined that the rent received from the Toowoomba property was assessable income, and that the respondent was entitled to deduct under the first limb of sec. 51(1) $646 being interest on borrowed funds and $2 being telephone expenses. Further, the majority concluded that the taxpayer was entitled to a deduction of $40 pursuant to sec. 67; as the Commissioner had allowed the sum of $18, a further deduction of $22 has to be made in calculating the assessment. The third member agreed that the $165 was assessable income, but he limited deductible outgoings to an amount equal to the income earned.

From that decision the Commissioner appeals to this Court.

There is no dispute as to the essential facts. The respondent's parents purchased the home at 14 Honey Street in approximately 1972. They borrowed money secured by a mortgage to finance the purchase. By 1978 the respondent's parents had separated, and his mother alone was residing in the home; she was having difficulty meeting mortgage repayments and other expenses relating to the home. The parents decided to sell the house and the respondent was given ``the first opportunity of purchase''. He had the house valued by a registered valuer and agreed to purchase the house at that valuation figure, namely $31,500. The respondent borrowed $20,000 from a building society and that money was used to pay out the mortgage securing the initial loan obtained by the parents. The balance, $11,500, became an interest free loan from the parents repayable on demand. Repayments to the building society are made by monthly payments of approximately $230. On or about 13 August 1981 a payment of $5,000 was made in reduction of the principal.

On 9 November 1978 a formal ``Agreement for Tenancy - Residential Premises'' was entered into between the respondent and his wife as landlords and the respondent's mother as tenant. The agreement was for a term of 12 months from 10 November 1978, and it provided for a weekly rental of $10 payable in advance. There is no need to refer to other covenants and terms of that agreement. On 10 November 1979 a further tenancy agreement was executed between the same parties, again providing a weekly rental of $10. On its expiration a fresh tenancy agreement was executed between the same parties on 10 November 1980; it provided for a term of 24 months, and the rent was increased to $15 per week. When that agreement expired on 10 November 1982, the tenant continued to occupy the premises and pay rental at the rate of $15 per week until 28 January 1983 when the rental was increased to $30 per week. That rental still applied in October 1983, and the respondent then swore that he did not have any present intention of increasing it. The increase from $10 to $15 per week was ``designed to reflect generally the increased cost of living, not an increase in my mother's capacity to support a higher rental''. The increase to $30 per week was ``occasioned by the fact that my father has returned to the subject property to live with my mother and accordingly there are two tenants, each of whom pays $15 per week''.

The following statements from the respondent's evidence before the Board are relevant for present purposes:

``The agreement that I have is that my mother occupies that house, pays me the weekly rental and that my wife and I are the landlords of the house. The house is in both names, both my wife's name and mine, with a view to reduction in tax when the house starts making a profit, which it will in due course.

...

I propose charging a rental of $15 a week and I appreciate that is not a very big increase. However, the rate that prices are going at the moment I should imagine it will only be a matter of two or three years before that house starts showing a profit. I have just sold my house at 34 Sardon Street and I propose to reduce the mortgage at 14 Honey Street which will make it even more viable. What I am interested in, however, is to make sure that I will protect my asset by retaining a good tenant in it so that when I retire in about 12½ years' time I will have something which is fairly substantial and will still return me some income.

...

The situation in Toowoomba is mechanically the same as the situation in Townsville. I have been paying tax on the income that I have been getting from rental up there since 1976 yet when I make a loss on the house in

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Toowoomba the loss is not deductible and I just do not know why.

...

Q. Really when one looks at the acquisition it was in part motivated by the fact that it would enable your mother to stay in the rental home and at a relatively nominal rental?

A. Yes, I could think of no more suitable tenant.

Q. Yes, quite, but you did not buy to get a suitable tenant; you bought it to give your mother shelter?

A. No.

Q. And an investment?

A. Yes it is something of an investment. It is something I purchased to provide me with an income, with a profit in time, not profit at resale but profit from rental.

...

I did not expect to make a profit in the first two, three or even four years.''

As counsel pointed out in the course of argument, the increase in rental to $30 per week, and the reduction in interest payments consequent upon the payment of $5,000 off principal on 13 August 1981, has had the effect of making the current position: gross rental per year $1,560, and interest on outstanding borrowed funds over 12 months $1,453. Thus a profit is now being made.

Counsel for the Commissioner did not object to the admissibility of evidence as to facts and events occurring after the relevant tax year, but submitted that little weight should be attached to such evidence. Counsel for the respondent relied on the often quoted statement of Lopes L.J. in In
re Grove; Vaucher v. The Solicitor to the Treasury (1888) 40 Ch. D. 216 at p. 242:

``During the argument it was contended that the conduct and acts of Marc Thomegay subsequently to February, 1744, at the time of the birth of Sara were inadmissible as evidence of Marc Thomegay's intention to permanently reside in this country at that time. It was said that we must not regard such conduct and acts in determining what the state of Marc Thomegay's mind was in February, 1744. For myself I do not hesitate to say that I was surprised at such a contention; it is opposed to all the rules of evidence, and all the authorities with which I am acquainted. I have always understood the law to be, that in order to determine a person's intention at a given time, you may regard not only conduct and acts before and at the time, but also conduct and acts after the time, assigning to such conduct and acts their relative and proper weight and cogency. The law, I thought, was so well established on that subject that I should not have thought it necessary to allude to this contention, unless I had understood that the propriety of admitting this evidence was somewhat questioned by Lord Justice Fry, a view which I rather now gather from his judgment he has relinquished.''

The whole history of the respondent's involvement with the property at 14 Honey Street, including events since 30 June 1979, must be taken into account in determining his intentions insofar as they are relevant to the issues which arise for determination.

The respondent also agreed that the initial rental of $10 per week was arbitrarily chosen, and that he could probably obtain $50 per week for the house on the ``open market''. The $2 claimed as a deduction for telephone expenses relates to phone calls made to the tenant to ensure that she was home when the respondent called to collect rent. As he lived some distance away there was a saving of expenses by so doing. It was agreed that if the interest payments were wholly or partially an allowable deduction, the telephone expenses should be allowed on a similar basis under sec. 51(1).

The relevant part of sec. 51(1) provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable 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...''

The leading case on the construction of that limb of sec. 51(1) is the decision of the High Court in
Ronpibon Tin N.L. v. F.C. of T. (1949) 8 A.T.D. 431 at p. 435; (1949) 78 C.L.R. 47 at pp. 56-57. In the judgment of the Court the following relevant passages appear:

``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The

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words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income... In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

The judgment goes on to say that the ``question of what expenditure is incurred in gaining or producing assessable income is reduced to a question of fact when once the legal standard or criterion is ascertained and understood''. That is particularly so ``when the problem is to apportion outgoings which have a double aspect, outgoings that are in part attributable to the gaining of assessable income and in part to some other end or activity''. One of the situations mentioned is that of a single outlay which serves ``both objects indifferently''; in that situation ``there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or rateable division because it is common to both objects'' (at A.T.D. p. 437; C.L.R. p. 59). Finally the following passage should be noted:

``It is important not to confuse the question of how much of the actual expenditure of the taxpayer is attributable to the gaining of assessable income with the question how much would a prudent investor have expended in gaining the assessable income. The actual expenditure in gaining the assessable income, if and when ascertained, must be accepted. The problem is to ascertain it by an apportionment. It is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent... The question of fact is therefore to make a fair apportionment to each object of the company's actual expenditure where items are not in themselves referable to one object or the other''

at A.T.D. p. 438; C.L.R. p. 60.

It is now clear that the purpose for which moneys are expended is of vital importance in determining whether or not the outgoing is incurred in gaining or producing assessable income. That emerges clearly from a consideration of the judgments of the Full Court of the Federal Court in
Ure v. F.C. of T. 81 ATC 4100; (1981) 50 F.L.R. 219 (a decision handed down after the determination of the Board in this case). In that case the taxpayer borrowed money at commercial rates and on-lent it at 1 per cent per annum to his wife and to a family company. He paid guarantee fees of 2 per cent to family companies which provided guarantees and securities for two of the loans. He also incurred legal and valuation fees in relation to obtaining the loans. The taxpayer claimed deductions for the interest and other payments, and the Commissioner substantially disallowed the claims. He allowed only a deduction of $660 for interest, that being the equivalent of the income received by the taxpayer from the on-lending. Lee J. of the Supreme Court of New South Wales dismissed an appeal by the taxpayer, who then appealed to the Full Court of the Federal Court. Brennan J. referred to Ronpibon Tin N.L. and went on to say that an ``outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income. The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use'' at ATC p. 4104; F.L.R. p. 223. He went on to point out that the disparity in interest rates in the case before him was itself ``eloquent to suggest the existence of purposes ulterior to the earning of interest at the rate of 1 per cent per annum, and the evidence confirms the existence of further purposes''. Those purposes included providing income to his wife, enhancing the profits of the family company, providing the taxpayer and his wife with a residence at a nominal rental, and enabling a family trust to take the benefit of any increment in the capital value of the property. He went on to say:

``The purposes for which money is laid out is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue (cf.
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549; (1980) 49 F.L.R. 183). In the present case, there is an air of unreality about the proposition that the borrowed moneys were laid out wholly for the purpose of earning a return of 1 per cent per annum. Rather is it right to say that the purpose for which the borrowed moneys

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were laid out included all the purposes earlier mentioned, only one of which was to earn a return of 1 per cent per annum''

(at ATC p. 4104; F.L.R. p. 224).

Deane and Sheppard JJ. in a joint judgment adopted a similar approach, but it is interesting to note the precise language they used:

``In considering the deductibility, pursuant to sec. 51(1), of the interest paid by the taxpayer, it is important to be mindful of the fact that an outgoing which is claimed to have been incurred in earning assessable income is only deductible, pursuant to the subsection, `to the extent which' it was so incurred and `to the extent to which' it cannot properly be characterised as being of a private or domestic nature. Where an outgoing was partially so incurred or should be partially so characterised, the subsection requires apportionment between what, not being of a private or domestic nature, should properly be regarded as incurred in earning the assessable income and what should not''

(at ATC p. 4108; F.L.R. p. 230).

They refer to the characterisation of the expenditure rather than the ``purpose'' in making the expenditure. That approach will often be more useful in resolving problems of the present type. Regard should also be had to the following passage in their judgment:

``The question whether an outgoing should properly be seen as being wholly or in part `incidental and relevant' to the `end' of gaining or producing the assessable income and the question whether the outgoing is wholly or in part of a private or domestic nature are both questions of characterization. Where liability to make the outgoing has been voluntarily incurred, those questions of characterization will ordinarily be determined by reference to `the object' which the taxpayer had in view (per Latham C.J. in
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290 at p. 301), the `result aimed at' by the taxpayer (per McTiernan J. ibid. at p. 308) or `the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer' (per Gibbs J. in
F.C. of T. v. South Australian Battery Makers Pty. Ltd. 78 ATC 4412 at p. 4420; (1978) 140 C.L.R. 645 at p. 660) in the context of the relevant facts and circumstances. In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case, however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing

...

In a case such as the present where the outgoing claimed as a deduction is interest paid on borrowed money, one... must, of necessity, look more to the objects or advantages which the application and use of the borrowed money were intended to gain''

(at ATC p. 4109; F.L.R. pp. 231-232).

Those passages were applied by Rogers J. in a situation where he had to determine whether taxpayers, who had been involved in a Curran scheme, could claim a deduction under sec. 51 for their share of the syndicate losses arising from the use of the scheme. After quoting at some length from Ure's case he said: ``In my view, the appropriate characterisation of the loss in question here is that it was incidental and relevant to one end only; that was to get a tax loss or advantage'' (
Deane & Crocker v. F.C. of T. 82 ATC 4112 at p. 4120; (1982) 60 F.L.R. 197 at p. 209).

Jenkinson J. (sitting as a Judge of the Supreme Court of Victoria) adopted a similar approach in
F.C. of T. v. Groser 82 ATC 4478. For a number of years, the taxpayer had allowed his parents and his mentally retarded brother to live in a house which he owned. He charged his parents $2 a week rent and paid all the outgoings on the property himself. After his parents' death, the taxpayer's brother continued to live in the house. The taxpayer arranged to receive his brother's invalid pension so that he could use those funds to meet the expenses of his brother's maintenance. It was also arranged that $2 would be deducted as rent. In his 1977 return, the taxpayer included in his assessable income rent totalling $104 and claimed a deduction of $522 for the expenses he had incurred in respect of the house (rates, mortgage interest, insurance, etc.). The Commissioner assessed the taxpayer on the basis that the rent was not assessable income and the expenses not deductible. Jenkinson J. held that the weekly payments

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received by the taxpayer from his brother did not constitute assessable income. They were a contribution to the funds out of which the taxpayer proposed to defray the expenses of ensuring proper care of his brother. The arrangement had nothing to do with transactions of a kind which result in the receipt of income as understood in ordinary usage. As the receipts were not assessable, he held that it followed as of course that the outgoings in respect of the house were not allowable deductions. But his Honour went on to hold that if the rent did in fact constitute assessable income, the deduction for expenses should be allowed up to the amount of the assessable receipts of $104 only. He so concluded because the taxpayer had incurred the outgoings for mainly private or domestic considerations and therefore the outgoings should be apportioned between what could properly be regarded as incurred or producing the sum of $104 and what could not be so regarded.

Two further expositions of sec. 51(1) should be noted briefly. Firstly, the Court is concerned with the actual payments made and not with the commercial efficacy or economic results thereof. In
Cecil Bros. Pty. Ltd. v. F.C. of T. (1962) 12 A.T.D. 449; (1962-1964) 111 C.L.R. 430 Owen J. said at A.T.D. p. 451; C.L.R. p. 434 (a passage approved by Dixon C.J. at (1964) 13 A.T.D. 261 at p. 262; C.L.R. p. 438 and Menzies J. at A.T.D. p. 262; C.L.R. p. 441):

``The fact that the taxpayer paid more for its purchases than it would have paid had it dealt direct with the manufacturers or wholesalers in order that Breckler Pty. Ltd. might make a profit out of the transactions does not, in my opinion, prevent the amount which it in fact paid from being regarded, for the purposes of sec. 51(1), as an outgoing incurred in gaining its assessable income. It seems to me that the contention really is that the taxpayer paid more for its goods than it should have. But `it is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent' (Ronpibon Tin N.L. v. F.C. of T. at p. 60).''

To similar effect are statements in the decision of the Privy Council in
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. (N.Z.) 76 ATC 6001; (1976) 1 W.L.R. 464. In delivering the majority judgment Lord Diplock said:

``... it is not the economic results sought to be obtained by making the expenditure that is determinative of whether the expenditure is deductible or not; it is the legal rights enforceable by the taxpayer that he acquires in return for making it... The true legal character of the whole of the expenditure claimed to be deductible is that of the purchase price of stock in trade for the Taxpayer Company's business of marketing petroleum products and nothing else. As such it is deductible in full in calculating the Taxpayer Company's assessable income from that business''

(at ATC pp. 6006 and 6009; W.L.R. pp. 471-472 and 474).

Secondly, the outgoing need not produce income in the year in which the expenditure was incurred. That was recognised under the equivalent of sec. 51(1) in the 1922 Act in W. Nevill & Co. Ltd. v. F.C. of T. (1937) 4 A.T.D. 187; (1937) 56 C.L.R. 290, especially per Dixon J. at A.T.D. p. 196; C.L.R. p. 305, and by E.A. Douglas J. in
Queensland Meat Export Co. Ltd. v. F.C. of T. (1939) 5 A.T.D. 176 at p. 178; (1939) St.R.Qd. 240 at p. 244. The question has been finally resolved by the decision in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1975) 132 C.L.R. 175. Barwick C.J. said at ATC p. 4064; C.L.R. p. 185: ``It is not possible now, to construe sec. 51 to mean that the expenditures and losses to be deducted must relate precisely to the assessable income which is returned for a year in which the expenditures are made or the losses are suffered''. He also agreed with the following statement by Mason J.:

``Looking at the question de novo the case for saying that `the assessable income' in sec. 51(1) means assessable income of the taxpayer generally without regard to division into accounting periods is to my mind irresistible. There is every reason for thinking that the definite article was used so as to designate the income of the taxpayer generally rather than the income of the taxpayer in the year in question. It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connection with the production of income in the year in question and to exclude losses and outgoings incurred in connection with the production of income in preceding or succeeding years. True it is that the expression `in gaining or producing' as it applies to assessable income may allow

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some expansion in the relationship which it would otherwise prescribe between the loss or outgoing and the production of income in the year in which the loss or outgoing was incurred, but the expanded relationship thereby suggested is hinged upon the notion that the taxpayer is conducting a continuing business, a concept which finds no expression in the first limb of sec. 51(1) for the ascertainment of the allowance of a deduction. The preferable course, so it seems to me, is to read the reference to assessable income in the first limb of sec. 51(1) as a reference to the assessable income of the taxpayer generally''

(at ATC p. 4071; C.L.R. p. 197).

The principal judgment in the Board of Review was delivered by Dr. Gerber (Mr. Hogan essentially agreed with him). He held that the rent received by the respondent was assessable income, and his reasoning in relation to the outgoings is summed up in the following passage: ``In the result, I find that the rent received by this taxpayer is assessable income, and any deductions provided for by the Act incurred in producing the income allowable pursuant to the first limb of sec. 51(1). It follows that the amount of interest ($646) as claimed and specified in the objection is allowable.'' It is clear that he did not specifically direct his mind to the question whether or not the outgoings could properly be characterised either wholly or partially as having been incurred in earning assessable income. In dealing with sec. 67(1) he did consider what was ``the dominant purpose'' of the respondent in buying the property. He went on: ``The answer is: (i) to provide his mother with a home; (ii) `It will only be a matter of two or three years before the house starts showing a profit'. On this finding, I am unable to conclude that (i) predominated over (ii).'' In those circumstances it appears to me that there was an error of law in the reasoning of the Board of Review and that the decision is properly reviewable in this Court.

The facts of this case are vastly different from those considered by Jenkinson J. in Groser. There is no suggestion here that the respondent's mother was in need of care. His parents took a decision to sell the house, and there is nothing to suggest that if the house had been sold to a stranger she would not have been able to care for herself (including obtaining somewhere to live) with the proceeds of that sale. The respondent already was earning income from renting a house in Townsville, and was in relation thereto being allowed to deduct his outgoings in the assessment of income tax. In consequence it must have been obvious to him that if he could purchase his parents' house with borrowed funds at valuation he would have a good investment which would produce income in the near future, and in the short term would enable him to provide accommodation to his mother at moderate rental. Thereafter he entered into formal tenancy agreements with her, providing for all the mutual rights and obligations which normally exist as between landlord and tenant. The expectations of the respondent that the investment would be ``self-supporting'' and returning a profit within a few years have been proven correct, as demonstrated by the figures for 1983. On the 1983 figures the Commissioner could hardly have rejected the respondent's statement that he had earned $1,560 per annum by way of rental.

Applying the test of ``characterisation'' to the outgoings I have to determine whether or not in the year in question they were ``incidental and relevant to the end of gaining or producing assessable income'' or were ``wholly or in part of a private or domestic nature''.

After considering the whole of the material I have come to the conclusion that the respondent acquired the property, namely the residence at 14 Honey Street, Toowoomba, with a view to gaining or producing assessable income from the rental thereof. If he had not been of the view that the purchase of the property would, within a few years, return him ``income'' the respondent would not have purchased the property. But at the same time, one of his motives in purchasing the property was the fact that he could thereby give his mother a home in which to reside at a moderate (non-commercial) rental for a period of years. But looked at over a period of some years, it is clear that the respondent intended to obtain and in fact obtained a net profit from the renting of the premises. In those circumstances the outgoings cannot be accurately characterised as being principally of a domestic or private nature.

From the day on which the respondent became the registered proprietor of the property he has formally leased the property to his mother. Since then rent has been regularly paid and received. The rental has been increased from time to time so that as at the date of hearing before me the total amount of rental

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received in one year exceeded the outgoings incurred in respect of the property in that year.

The Board concluded that the $165 received by the respondent in the relevant year was income. I cannot see how on the facts stated above that conclusion could be avoided. It was submitted on behalf of the Commissioner that I should find that ``the taxpayer had no relevant purpose in gaining assessable income''; but that is not really a definitive test for determining whether or not money in fact received by the taxpayer is ``income'' for the purposes of the Act. The facts here are clearly distinguishable from Groser's case where the money received by the taxpayer was not received by way of income, but rather to provide a fund to ensure the proper care of the taxpayer's brother who was the source of the money in question. Here the money received became the respondent's property and he could do with it what he wished. In those circumstances, unless the tenancy agreement was legally a ``sham'', or the ``arrangement'' was otherwise void as against the Commissioner, the money received by way of rent must be treated as income. The Board considered the submission that the tenancy agreement was a ``sham'' and rejected it - correctly in my view. The Board referred to
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802; I would add references to
Re George Inglefield Ltd. (1933) Ch. 1 at p. 17 and
Paintin & Nottingham Ltd. v. Miller Gale & Winter (1971) N.Z.L.R. 164 at pp. 168, 175 and 176. Applying the test referred to in those decisions it could not be said on the evidence that the relationship of landlord and tenant here was a ``sham''. Further, there is no basis for a submission that sec. 260 of the Act voids the ``arrangement'' against the Commissioner; indeed no such submission was made. Any such submission would be without foundation given the reasoning in Cecil Bros. Pty. Ltd. v. F.C. of T. (supra).

For those reasons I hold that the amount of $165 received in the financial year to 30 June 1979 was assessable ``income'' of the respondent.

One of the respondent's objects in incurring the outgoings was to provide his mother with good accommodation at moderate cost. Dr. Gerber was unable to conclude that such object predominated over the object that the house should return a profit on investment. But he did not find that those objects were of equal importance. Given the respondent's Townsville experience, the fact that his mother was not in dire need, his sworn evidence as to intention at the time, and his subsequent conduct in raising the rent and reducing the level of borrowed funds so that a profit was generated, I conclude that his predominant object in borrowing money and incurring an obligation to make payments by way of interest was to earn assessable income. Only a relatively minor or incidental object was to provide his mother with a home; an object of a private or domestic character. In those circumstances I must apportion the outgoings so that a fair and reasonable assessment is made of the amount expended in gaining or producing income as distinct from that having a private or domestic nature. Taking into account all the factors I have referred to the appropriate apportionment in this case is to treat 80 per cent of the outgoings as having the requisite characteristic of outgoings incurred in earning assessable income. However, if 80 per cent of the outgoings was less than the actual amount of assessable income earned from the use of the borrowed funds, the appropriate deduction under sec. 51(1) would be such portion of the outgoings as equated the income earned. During the income year in question 80 per cent of the relevant outgoings would exceed the amount of income received and in consequence the apportionment of 80 per cent should be applied.

It follows that the Commissioner's appeal should be allowed to the extent that the Board of Review's decision is varied so that the respondent is allowed a deduction of $516.80 in respect of interest, and $1.60 in respect of telephone expenses.

The same apportionment should apply to the deduction allowed pursuant to sec. 67(1). In that regard the Commissioner's appeal should also be allowed to the extent that the decision of the Board of Review is varied by finding that the respondent is entitled to a total deduction of $32, or $14 more than the amount allowed by the Commissioner.