Federal Commissioner of Taxation v. Charlton.Judges:
Supreme Court of Victoria
The taxpayer is a medical practitioner. In 1946 he purchased a house in Brunswick Street, Fitzroy as his family home. This house has continued to be the family home in every sense of the expression. At the conclusion of his was service the taxpayer practised as a general practitioner. After some years he ceased general practice and took a series of hospital appointments that permitted him to work as a trainee pathologist. In due course he received the appropriate qualification as a specialist pathologist. He obtained employment with the Commonwealth Health Department as a pathologist. Some years ago
ATC 4416the Department appointed him to its pathology department attached to the Bendigo Hospital.
Despite this provincial appointment, the taxpayer continued to maintain the family home at Fitzroy. It was there that his wife and children lived. He returned there whenever he could, spending only the period from Monday to Friday in Bendigo in order to meet the requirements of his employment. He found that the most convenient and congenial domestic arrangement to adopt in the circumstances was to lease a small flat in which to stay when required to be in Bendigo. This he did. The flat could not in any sense be described as the taxpayer's real place of residence or even as a holiday home. His children rarely, and his wife only occasionally, visited or stayed at the flat.
At all material times there was no State Government pathologist at Bendigo. No local medical practitioner wished to conduct post-mortems. The result was that, upon his posting to Bendigo, the taxpayer agreed with the Bendigo Coroner to carry out autopsies if and when required by the Coroner. The consent of the taxpayer's employer, necessary to enable this to be done, was duly granted. The autopsies were performed at the hospital mortuary with instruments supplied by the hospital. After the completion of a post-mortem, he wrote up his report in draft and arranged for it to be typed in the hospital's clerical department. The signed report was then provided to the Coroner.
The taxpayer was due to retire from his Commonwealth post on reaching the age of 65 in May 1978. However, because of accrued leave entitlements, he ceased actual work for the Commonwealth at the end of December 1977. He was aware that as, upon his departure from Bendigo, his replacement would neither wish nor be called upon to perform post-mortems, the local Coroner would be faced with great difficulty in finding a medical practitioner willing and able to perform such work. Accordingly the taxpayer offered to return, as and when needed, to perform those that Coroner might require. The offer was accepted. Some autopsies are required to be carried out urgently. They are performed at different times of the day or night. The number of autopsies being performed at that time was variously said to be about 120 or 150 each year.
In these circumstances, in order to avoid excessive travelling and the fatigue that conformity with this arrangement might be expected to impose if the taxpayer should be without premises in which to rest, he elected to retain his Bendigo flat. The term of the original lease of the premises had long since expired and the taxpayer was holding over pursuant to a weekly or monthly tenancy. The furniture in the flat was his own.
Despite these arrangements the taxpayer was anxious to obtain other suitable employment as soon as possible. For some time he was, with one exception, unsuccessful. During the first three weeks in January 1978 he did obtain part-time relieving work at the City Mortuary at Melbourne during the absence on leave of a staff pathologist. This work took up about a half-day per week. It is not known whether the taxpayer was required to visit Bendigo during that period. He was next employed during May 1978 at the Wangaratta Hospital. He travelled at times to Bendigo during that month. His Bendigo commitments during that month were required to be discharged in the period outside 9 a.m. to 5 p.m. each weekday.
For each autopsy performed he was entitled to the payment of a fee prescribed by regulation. He claimed payment of the fee by completing an appropriate form and lodging it at the Bendigo Coroner's office. The smallness of the fee earned compared with the expense involved in earning made his continued participation in such work economically unacceptable. Accordingly, at the end of May he terminated the arrangement. He said, and I accept, that he did the work for those five months only out of a sense of moral obligation to the Coroner. During that period he was without the office he formerly had at the Commonwealth laboratory. What he did in that time was to write up his draft report (which had to be done soon after completion of a post-mortem in order to avoid loss of recollection) at his flat and then leave it to be typed by a member of the Law Department staff at the court house. He supplied his own non-official stationery etc. as was necessary for this procedure to be adopted. Also, he kept at the flat (as, indeed, he had always done) medical texts and periodicals for professional reference use.
In his return of income for the year ending 30 June 1978 the taxpayer claimed as an outgoing the rent he paid in respect of the flat for that year. The claim was disallowed as was his objection to the assessment. The Com-
ATC 4417missioner's decision was referred to a Board of Review. At the hearing before that tribunal the taxpayer restricted his contention to one that the rental paid from January to May inclusive was an allowable deduction under sec. 51(1) of the Income Tax Assessment Act. It has not been in dispute that the rental paid for that period was $1,100. The Board upheld that contention and ordered that the assessment be amended accordingly. The Commissioner has appealed from that decision. It is that appeal which is now before me for adjudication. Section 51(1) is in these terms:
``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.''
It will be seen that a taxpayer may claim an outgoing as an allowable deduction by resort to one or other of two limbs to which the section refers. His primary submission is that his activity during the relevant months in performing coronial autopsies amounted to a business and that the flat rental was an outgoing necessarily incurred in carrying on that business. Alternatively, it was said that the payment was an outgoing incurred in gaining or producing his assessable income. As a further alternative to both these principal submissions it was argued that, if the expenditure was not wholly incurred in carrying on a business or in gaining assessable income, then, to the extent that it was, that reduced sum constituted an allowable deduction. In this connection it was said that an entitlement to a deduction of a lesser sum could be found to have been established in one or other or both of two ways. In the first place, it was suggested that during the period of five months he needed an office in Bendigo in connection with the work he did and he used the flat in part for such a purpose. A proportion of the rent that could reasonably be said to be referable to such a use should thus be treated as an allowable deduction. The other way was this: If not otherwise allowable, the rent payable whilst the taxpayer was working in other employment should be treated as standing in a different position so that that rent might properly be characterised, for the reasons relied upon by the taxpayer, as an allowable deduction.
Now, in relation to the scope of these various submissions, the Commissioner relied upon a preliminary objection. It was said that they go beyond the grounds stated in the taxpayer's objection and to the extent that they do he is now precluded from relying upon them. Section 190(1) of the Act requires that upon an appeal ``the taxpayer shall be limited to the grounds stated in his objection''. The grounds so stated have been expressed as follows:
``On behalf of our client we wish to object to his assessment No. 257131/048 dated 11th May 1979, on account of the year ended 30th June 1978.
The reason for the objection is the disallowance of accommodation expenses $2,340.00.
Our client is employed by the Commonwealth of Australia as a doctor. He is also employed from time to time by the Victorian State Government as a pathologist. In both these capacities he is required to travel a great deal between Melbourne and Bendigo. In fact, he rents a flat in Bendigo as he is required to stay there three or four days per week. Our client owns his own home in Fitzroy, and the flat is maintained in Bendigo purely and simply because of his job. If our client did not have this job he would not incur this expense, which, since it is the result of producing assessable income, should be an allowable deduction.
It should be noted that this claim has previously been allowed and as it is an expense which is in direct relation to income earned, it is allowable under Section 51.''
It was said that, as the objection asserts that the taxpayer was employed by the Victorian State Government, it should be construed as an admission by him that at the material time he was an employee and, in consequence, not a person carrying on a business. Accordingly, it was maintained that (although he was not required to be so limited at the Board of Review hearing) the taxpayer should in this appeal be confined to reliance on the first limb of sec. 51(1).
Although the grounds of objection are required to be ``sufficiently explicit to direct the attention of the respondent to the particular respects in which the taxpayer contends that the assessment is erroneous'', they may be stated in ordinary language. See per Williams J. in
H.R. Lancey Shipping Co. Pty Ltd. v. F.C. of T. (1951) 9 A.T.D. 267 at p. 272; (1951) A.L.R. 507 at p. 512. Moreover, as Dixon C.J. said in
A.L. Campbell & Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 310 at p. 316; (1951) 82 C.L.R. 452 at p. 461 ``courts should not interpret grounds of objection technically, narrowly or with rigidity''.
It appears to me that, in his informally stated grounds of objection, the taxpayer was not seeking necessarily to limit himself to reliance upon the first limb only of the subsection. Nor should the words be so narrowly construed for them to be treated as amounting to an admission that the taxpayer was not carrying on a business. I think that, if given a liberal interpretation, the communication should be held to be an appeal in general terms to the benefits afforded by the subsection. I consider therefore, that the taxpayer is free to seek to rely on the second limb of the enactment.
Counsel were agreed that the authorities suggest that there is little practical distinction between the two limbs of the subsection. See
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 8 A.T.D. 431 at p. 435; (1949) 78 C.L.R. 47 at p. 56. However, as it was thought that the second limb might be somewhat greater than the first in the amplitude of its operation counsel were concerned to debate, as a further preliminary question, as it were, the correct characterisation of the income-producing status of the taxpayer in relation to the income in respect of which he said the incurrence of rent payments was an allowable deduction.
The Commissioner maintained that the taxpayer was an employee. If he were, then his income-producing activity could not be described as the carrying on of a business. Of course, the contrary would not follow. In my opinion, the arrangement into which the taxpayer entered with the Coroner acting on behalf of the Crown Law Department whereby he (the taxpayer) agreed to perform autopsies when called on to do so was not such an agreement as to constitute the taxpayer an employee. Counsel for the Commissioner referred to the standard texts on Master and Servant and contended that the taxpayer's non-provision of facilities and equipment required in the performance of his duties together with what was said to be the measure of control exercisable over him did, in the circumstances, render him an employee. His counsel pointed to the nature of the work and the circumstances of its performance. In particular, he relied upon the terms of the Coroner's Act 1958 (as amended) whereby a coroner is empowered to call on a medical practitioner to perform an autopsy in return for the payment of a statutorily prescribed fee. It was this enactment which, it was said, could upon ultimate analysis be seen to establish the structure of the relationship. It is unnecessary to refer in any further detail to these arguments. That the relationship of master and servant did not exist between the State and the taxpayer is, I think, too obvious to require further attention.
The next question is - Was the taxpayer then carrying on a business? It is true that ``business'' includes any profession: see sec. 6(1). However, as the appellant's counsel pointed out, the Act itself recognises that the derivation of income earned is not subject to the simple dichotomy of either the wages of an employee or the proceeds from the carrying on of a business. That recognition appears in the definition of ``income from personal exertion'' appearing also in sec. 6(1). The definition includes an intermediate classification described as ``allowances and gratuities received in... relation to any services rendered''. The fees the taxpayer received, if not received by him as an employee, were (so the Commissioner submitted) allowances for services rendered and, as such, any outgoing claimed in respect of them must meet the requirements of the first limb if it is to be treated as an allowable deduction.
On the other hand, the taxpayer contended that the intermediate category of income was designed to have included as assessable income an allowance paid for a ``one-off'' service rendered when the provider of which could not be described either as an employee or as a person carrying on a business. In this case, whilst the work performed was intermittent in nature, there was a certain regularity about it. The nature and manner of its performance should, it was said, lead to the taxpayer's being characterised as an ``independent contractor''
ATC 4419and thus one who was carrying on his own business.
The resolution of this issue is not free from difficulty. However, in the end I have concluded that with regard to the post-mortem work performed by him, the taxpayer could not be described as ``carrying on a business''. There is a number of factors that have inclined me to that view. What the taxpayer did in that regard amounted to a part-time job carried on outside his full-time employment. Whilst still a Commonwealth officer stationed at Bendigo the taxpayer (who was a man of manifest integrity and possessed a deep sense of propriety and whose evidence, it goes without saying, I accept completely), if required by reasons of urgency to carry out an autopsy during working hours, did so but refused to lodge a claim for payment of a fee. He had no medical practice. On retirement he simply continued his former part-time activity. He opened no office and he employed no staff. Of course, an activity carried on in a small way is no less a business on that account. But there needs to be some degree of commerciality about its operation and there must exist in relation to it some perceivable structure or organisation. The taxpayer had only one ``client''. Nor was there that degree of continuity or regularity which may be thought commonly to be found in the conduct of a business.
The applicant contended that there was sufficient degree of regularity in what was done to allow the activity properly to be characterised as a business. In particular it was pointed out that what was done could certainly not be characterised as a ``one-off'' activity. Nor was there any ``contract'' between the Coroner (as an agent) and the taxpayer. These and other considerations upon which reliance was placed have not, however, been sufficient to persuade me to a view contrary to that which I have already indicated I hold. The respondent carries the burden of proving that the assessment is excessive (sec. 190(b) and
F.C. of T. v. Mantle Traders Pty. Ltd. 80 ATC 4588). That the taxpayer was carrying on a business is an integral part of his case that the disallowed sum claimed as a deduction was deductible as an outgoing necessarily incurred in carrying on that business. The taxpayer has not discharged the burden of establishing that essential fact upon which (inter alia) the success of the case which rests upon the second limb of the subsection depends.
This brings me to the question whether the rental, or any part of it, was an outgoing incurred in gaining or producing the taxpayer's assessable income. A number of cases has authoritatively established the considerations to which regard is to be had when one is considering the question as to what is such an outgoing. For example, to be deductible the outgoing must be an expense incurred in the course of earning assessable income:
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 3 A.T.D. 288 at pp. 297-298; (1935) 54 C.L.R. 295 at p. 309. Also, the expense must be incidental and relevant to the production of income: Ronpibon Tin N.L. case, supra, at A.T.D. p. 435; C.L.R. p. 56. It is in this respect that the parties have been primarily in dispute; the question in contest being whether there was a sufficient nexus between the expenditure and the derivation of income. The solution to the question turns on an objective view of the relevant facts and not, of course, upon what the taxpayer may have thought as to the existence of such a nexus:
F.C. of T. v. Highfield 82 ATC 4463 at p. 4471. So far as the present case is concerned, it is a question of whether the work demanded that the taxpayer reside from time to time in his Bendigo flat. The question is not whether he required or desired so to reside. There must be something in the nature of the work that demanded that the taxpayer stay in the flat.
The contention of the Commissioner was that, if the taxpayer chose to live so far from the place where he was required to be in order to gain or produce his assessable income so that it was necessary to incur expense in order to reach that place, that was an expense personal to himself or the result of his own volition in choosing to live where he did. It was thus not one incurred in earning his income. The general proposition upon which this submission was sought to be found is, of course, well established. See, for example,
Lunney v. F.C. of T. (1958) 11 A.T.D. 404; (1958) 11 A.T.D. 404; (1958) 100 C.L.R. 478 and
Newson v. Robertson (1953) 1 Ch. 7. The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he not only needs to incur expense in travelling to that place but also to incur expense in the
ATC 4420provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible. Whilst the reported cases dealing with the latter type of expense are less numerous than those concerning the former, the principle that governs the latter cannot, it was said, be different from nor of less effectiveness than that which should determine the former.
In any event it was submitted that powerful support for the latter proposition can be found in the judgments in
Ricketts v. Colquhoun from Rowlatt J. ((1924) 2 K.B. 347) who dealt with a case stated by the General Commissioners through the Court of Appeal ((1925) 1 K.B. 725) to the House of Lords ((1926) A.C. 1). The decision of the House of Lords has frequently been referred to by the High Court without adverse comment. In a number of cases of appeals to single Judges, it has been distinguished by reference to the particular facts with which the later cases were concerned. The taxpayer's counsel suggested that collectively these cases represent a substantial erosion of the authority of Ricketts' case and indicate that it is no longer consonant with acceptable contemporary views as to the appropriate construction of sec. 51(1), although, with this contention should be compared the remarks of Lord Salmon in
Taylor v. Provan (1975) A.C. 194 at p. 227. The applicant sought also to persuade me to put Ricketts' case on one side because of the substantially different terms in which the legislation is expressed in each country.
However, in my opinion, the principle central to the decision in Ricketts' case remains intact and is one that must be treated as carrying the approval of the High Court. In that case the taxpayer, who was a barrister living and practising in London, was, as Recorder of Portsmouth, obliged to pay the costs of travel to Portsmouth four times a year and hotel expenses for accommodation whilst he held his Court there. The taxpayer claimed these expenses were deductible from his income. As to this claim the Lord Chancellor, Lord Cave, observed (p.6) that -
``A man must eat and sleep somewhere, whether he has or has not been engaged in the administration of justice. Normally he performs those operations in his own home, and if he elects to live away from his work, so that he must find board and lodging away from home, that is by his own choice, and not by reason of any necessity arising out of his employment; nor does he, as a rule, eat or sleep in the course of performing his duties, but either before or after their performance.''
Even though in the English case the Courts were concerned to construe provisions expressed in quite different language, it appears to me that the concept expressed in the passage cited is of no less cogency when the leading words of sec. 51(1) fall for construction and application to a given case.
It is to be observed that Pollock M.R. in the Court of Appeal remarked (at p. 731) -
``... where the office is of such a nature that in order to execute its duties its holder has to travel from place to place, has, in other words, itinerant duties, there the expenses of such travelling, necessary to and involved in the work attached to the office, are and may be allowed as an expense...''
This observation can scarcely have less application to the incurrence of accommodation expenses in the course of the performance of such ``itinerant duties''. On the other hand, as the High Court held in
F.C. of T. v. Maddalena 71 ATC 4161, the cost of obtaining employment does not form an outgoing incurred in the course of gaining employment.
It appears to me that in seeking the answer to the question whether an outgoing has been incurred in gaining or producing income it is necessary first to determine the essential character of the expenditure so that it will appear that it has either been dictated by the income-producing activity or, on the other hand, has been incurred for private purposes. That is to say, what has to be examined is the relationship between the expenditure and the production of income. But the test cannot be whether the expenditure was proper or reasonable.
F.C. of T. v. Green (1950) 9 A.T.D. 142 at p. 146; (1950) 81 C.L.R. 313 at p. 317.
The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his
ATC 4421work was an expenditure dictated not by his work but by private considerations. There was an exception to this in the month of May. He was then required by his employment to work in both Wangaratta and Bendigo. The nature and circumstances of that work made the taking of rest at Bendigo necessary. The keeping of a flat during that month was dictated by his income-producing activity and was incidental to his work. Cf.
Owen v. Pook (1970) A.C. 244; Taylor v. Provan (1975) A.C. 194 and
F.C. of T. v. Collings 76 ATC 4254. It was said by the taxpayer that the first three weeks in January should be treated as being in the same category. I do not think they are. The part-time work then carried out was undertaken in Melbourne where his home was. Moreover, there is no evidence that, unlike as he did in May, during those three weeks in January the taxpayer did in fact visit Bendigo to perform autopsies.
It was even argued on behalf of the taxpayer that all five months' rental should be treated as deductible on this basis: apart from any period or periods during which he had work to perform in places other than Bendigo so that during such period or periods he had to travel and secure accommodation wherever his home might be, he was looking for work and his home in Melbourne was during, and for the purpose of, such activity his ``base''. There is insufficient evidence to support such an argument - even if the principle upon which it is founded be treated as valid. Cf.
Horton v. Young (1971) 3 All E.R. 412.
Finally, I think, it is not possible to apportion the rental so as to attribute part of it to the cost of the maintenance of an office. There is no basis disclosed on which such an apportionment could be made. Then, the references to occasional telephone calls at the flat, the writing of reports there and the keeping of reference books in it afford far too slender evidence to justify a finding that a proportion of the rent was reasonably attributable to unkeep of office facilities in the flat. The essential character of the expenditure for use of the flat was for accommodation and, until this appeal, it was on this ground alone that the rent was claimed to be an allowable deduction. See
Handley v. F.C. of T. 81 ATC 4165; (1981) 148 C.L.R. 182 and
F.C. of T. v. Forsyth 81 ATC 4157; (1981) 148 C.L.R. 203.
For the foregoing reasons I am of opinion that the taxpayer's expenditure upon rental for the flat, other than for the month of May, cannot be characterised as having been an outgoing incurred in gaining or producing assessable income. It follows that the assessable income which the taxpayer derived during the income year in question should be reduced by one-fifth of $1,100 - $220 and, subject to that adjustment, the appeal must succeed.
I allow the appeal. Order that the matter be remitted to the Commissioner to amend his assessment in accordance with these reasons for judgment.
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