BJ McMahon DP
Administrative Appeals Tribunal
BJ McMahon (Deputy President)
The applicant submitted a return of income for the year ended 30 June 1988. Certain items were disallowed as deductions. The applicant's objection to the assessment was in turn disallowed. This application is brought to review that objection decision.
2. In the year in question, the applicant was a senior journalist employed by a Sydney newspaper company. Although he was not a specialist journalist, his work tended to be specialised in certain areas. He was the editor of features which are articles written on particular topics. These articles are designed to instruct and entertain the reader and, at the same time, to attract relevant advertising. The applicant wrote many of the features himself and supervised the writing of the remainder of them.
3. In the course of his work, he was closely associated with the advertising department of the newspaper. This involved him in meetings with potential advertisers and in making presentations to them, in conjunction with other employees, concerning the advantages to be gained by advertising connected with proposed features. In the course of his work, he was also obliged to interview many people, to consult works of reference, including newspapers and journals, and to record television programs that contained items of relevance to any particular feature on which he was then working. The deductions claimed relate to these working activities. It is convenient to take them in 4 groups.
4. In a classified advertisement, the applicant came across information which led him to take a structured course of 13 visits each Friday afternoon. It was referred to in correspondence and in the applicant's return as ``speech course''. In view of the evidence given before me, this seems to be an inappropriate description and one which probably led to misunderstandings resulting in the assessment. The applicant said that it had been suggested to him he could take up broadcasting. In his own opinion however, he did not have an adequate voice. He also felt certain deficiencies in his manner of presentation in his current work and decided that he would be better qualified for advertising ``pitches'', as he called them, and in interviewing subjects for his features if he took a course of the nature he described. It was conducted by a registered speech therapist and was directed to the improvement of the applicant's breathing, his enunciation (he said that he had a lazy ``r'') and to the general production and projection of his voice. He said that his main reason for undertaking the course was so that he would be better able to present himself to people in a work situation.
5. The deduction is claimed under s 51(1) of the Income Tax Assessment Act (``the Act'') which is in the following terms-
``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.''
6. It was accepted that the expense had been incurred and had been properly substantiated. The claim was rejected as the outgoing was considered to be private in nature. The Commissioner relied upon Case
N64, 81 ATC 334
ATC 383.There is no doubt that expenditure for a course for medical or therapeutic purposes (in the case cited, it was for overcoming a speech impediment) would be private to the individual. As the course was described to me however, there appears to be no medical component and nothing that might distinguish the course from the many other courses, the cost of which have been allowed as relevant and working expenses. On my view of the evidence, the cost was incurred in maintaining or increasing the applicant's ability in his profession and accordingly was necessarily incurred in carrying on his profession or calling (
FC of T v Finn (1961) 12 ATD 348 at 352; (1961) 106 CLR 60 at 70). I would therefore set aside the objection decision in so far as it relates to this expense of $325.
7. In the year in question, the applicant and his wife undertook a trip to Noosa. He said that when the travel editor of his newspaper heard that he was going to that part of Queensland, the editor asked if he would do a story. The applicant agreed to do the necessary research at Noosa and to write it. The story was eventually published. A claim was made for air fares of $180, accommodation of $160 and miscellaneous of $100, totalling $440. The applicant said that he did not claim for the whole trip and that the amount involved could be as low as 40 per cent of his overall expenses. The only substantiation presented was a copy of an airline ticket issued to the applicant, covering a flight leaving Sydney at 9.45 am on Wednesday 9 September, returning on a flight at 5.55 pm on Tuesday 15 September. It was not contested that if substantiated, the travel expenses or an appropriate part of them could be regarded as relevant working expenses. The claim was rejected, however, on the basis that no diary had been supplied pursuant to sub- section 82KZ(2) of the Act.
8. Travel expense is defined in s 82KT(1) in the following words-
``82KT(1) In this Subdivision, unless the contrary intention appears-
- `travel expense' means an outgoing incurred by a person in respect of-
- (a) travel by the person outside Australia; or
- (b) travel by the person within Australia that involves the person being away from the person's ordinary place of residence for a continuous period including more than 5 nights,
- but does not include a car expense or an eligible expense in relation to a travel allowance;''
9. The requirement to keep a diary is to be found in s 82KZ(2) which is in the following terms-
``82KZ(2) Subject to this Subdivision, a deduction is not allowable under this Act in respect of an expense incurred by a taxpayer, being-
- (a) an eligible expense in relation to a travel allowance; or
- (b) a travel expense,
unless, in relation to each activity engaged in by the taxpayer-
- (c) while undertaking the travel to which the expense relates; and
- (d) in the course of producing assessable income of the taxpayer,
the taxpayer makes in the English language in a diary or similar document, before, at the time of, or as soon as reasonably practicable after, the conclusion of the activity, an entry setting out particulars of-
- (e) the date on which the entry was made;
- (f) the place where the activity was undertaken;
- (g) the date and approximate time when the activity commenced;
- (h) the duration of the activity; and
- (j) the nature of the activity.''
10. The airline ticket indicates that the applicant was likely to have been away from his ordinary place of residence for a continuous period of more than 5 nights. The ticket would indicate that 6 nights were spent in or about Noosa. Accordingly, ``travel expense'' must be given the statutory meaning and the claim cannot be met unless the statutory requirements are complied with. The word ``including'' in paragraph (b) of the definition must, in my view, mean merely ``of''. It does not extend the required continuous period.
11. The travel expenses diary must be kept in relation to each activity alleged to have been carried out in the course of producing assessable income. Although the working expenses may have been incurred only for a short period within the overall total of the time away from the usual place of residence (certainly for a period of less than 5 continuous nights), a diary must nevertheless be kept of the activities carried out in that short period. In the absence of any such diary, questions of substantiation or whether the expenses are work related do not arise. The applicant does not meet the threshold requirement, compliance with which is essential before any further question of deductibility can be considered. I would therefore affirm the decision under review, in so far as it relates to the travel expenses of $440.
Cassette tapes and accessories
12. The applicant claimed an amount of $1,428 for the following-
video cassette tapes $754 cassette tapes (audio) $180 replacement of cassette recorder $168 replacement of calculator and batteries $66 batteries for cassette recorder $260 Total $1428
13. It was not disputed by the Commissioner that the expenses were work related. It was considered that the substantiation requirements had not been met and that particularly, the applicant had failed to comply with s 82KU(1)(b) of the Act.
14. The general requirements of substantiation that are relevant to this and the next heading of the applicant's claim are as follows-
``82KU(1) A reference in this Subdivision to documentary evidence of an expense incurred by a taxpayer is, except in the case of depreciation, a reference to a document, being a receipt, invoice or similar document, that-
- (a) sets out-
- (i) in any case - in the English language; or
- (ii) in a case where the expense was incurred outside Australia - in a language of the country where the expense was incurred,
- particulars of-
- (iii) the date on which the expense was incurred;
- (iv) unless sub-paragraph (v) applies - the name of the person who supplied the goods or services to which the expense relates;
- (v) if the goods or services to which the expense relates were supplied in the course of a business carried on by a person - the name of the person or the business name under which the person carries on the business;
- (vi) the amount of the expense expressed in the currency in which the expense was incurred;
- (vii) the nature of those goods or services; and
- (viii) the date on which the document was made out;
- (b) is supplied by or on behalf of the person referred to in sub-paragraph (a)(iv) or (v), as the case may be; and
- (c) is obtained by or on behalf of the taxpayer at, or as soon as reasonably practicable after, the time when the expense is incurred.
82KU(3) Where the person carrying on a business does not, in the ordinary course of the business, supply a receipt, invoice or similar document constituting documentary evidence of-
- (a) an expense (other than depreciation) that was incurred by a taxpayer and relates to goods or services that were supplied in the course of the business; or
- (b) an expense constituted by depreciation in respect of property that was supplied to a taxpayer in the course of the business,
sub-section (1) or (2), as the case requires, applies in relation to such an expense as if a reference in that sub-section to a receipt or invoice included a reference to a statement or certificate.
82KU(6) Where, at, or as soon as reasonably practicable after, the time when a taxpayer incurs an expense that, by virtue of sub- section (7) or (8), is an undocumentable expense-
- (a) an entry setting out-
- (i) except in the case of depreciation of the kind referred to in sub- paragraph (ii) - the particulars that would be set out in documentary evidence of the expense (other than particulars of the date on which the documentary evidence was made out);
- (ii) in the case of depreciation in respect of property, being depreciation that, by virtue of sub- section (7), is an undocumentable expense - particulars of the property and of the amount of the depreciation; and
- (iii) particulars of the date on which the entry is made and the name of the person making the entry,
- is made in the English language, by or on behalf of the taxpayer, in a diary or similar document; and
- (b) the diary or similar document is signed, in relation to the entry, by the person making the entry,
then, for the purposes of this Subdivision-
- (c) the taxpayer shall be deemed to have obtained documentary evidence of the expense; and
- (d) so much of the diary or similar document as sets out those particulars shall be deemed to be documentary evidence of the expense.''
15. The applicant had a business association with a named friend who, he said, was able to obtain cassette tapes and supplies at a substantial discount. From time to time, he would ask this friend to obtain tapes from him. They would be delivered to the applicant's home by the friend together with a receipt from the supplier. The applicant would then reimburse his friend in cash. Five of these receipts were produced to the Commissioner for amounts totalling $1000 exactly. They were dated 21 July 1987, 8 August 1987, 28 August 1987, 12 September 1987 and 10 October 1987. The applicant explained that he was unable to find any further receipts for the period from October 1987 to 30 June 1988 and I see no reason to reject that explanation. The receipts are headed with the name of a firm, indicate that cash was received and in 4 of them describe the goods as one box of videos and one box cassettes. The fifth receipt describes ``4 vs, 4 cassettes, calculator''.
16. On the evidence given before me I see no reason to reject a construction that these receipts were issued by the supplier of the goods to the applicant's agent, namely his friend. In all other respects the requirements of s 82KU(1) appear to have been met. I would therefore allow this objection to the extent of the substantiation, namely $1000.
17. Another document was produced as a receipt of an invoice from a duty free shop for an amount of $141.05. It was said that this was the receipt for the replacement cassette recorder. The document on its face does not bear this out. The amount of the receipt does not tally with the amount set out in the return nor does the description of the goods. The applicant said that the difference could be accounted for by batteries. This is not consistent with what appears in the return. In my view, the document is not a compliance with the substantiation provisions. The company that issued the document has now gone out of business, I was informed. It has not been possible to obtain anything in clarification of the only document that has been supplied.
Newspapers and journals
18. The applicant stated in his return that he had purchased newspapers and journals in the financial year to the value of $2933. From that he deducted 15 per cent private use namely, $440 (in fact the deduction was not made as the gross figure was carried over into the running total). The claim for the cost of these publications was rejected because the purchases were not sufficiently substantiated. When the applicant was requested to produce receipts, he prepared 2 documents. Each of them has the identical opening words-
``This is to certify that [the applicant] was a regular customer of this newsagency for the period 1st July, 1987 to 30th June, 1988. The newspapers and journals listed below would be a true reflection of his purchases at this store. The value of the purchases would be in excess of [$1705 in one case and
ATC 386$1228 in another case] for the above period.''
The documents then list the titles of substantially the same publications. Opposite them are set out estimates of the number and value of those purchased during the year.
19. He said in evidence that the documents were prepared some time after 16 August 1989, the date of the Commissioner's letter requesting substantiation. This in itself would indicate a non-compliance with sub-section 82KU(1)(c). The documents cannot be said to be a ``diary or similar document'' and thus a compliance with sub-section (6). In any event the applicant agreed he received cash register receipts for many of his purchases. They were therefore not undocumentable expenses. The applicant said that he took the document with names of publications and costs opposite them totalling $1705 to his local newsagent. He there spoke to a man known to him only by a nickname. He said that the person to whom he spoke knew him by sight, and after a few minutes when told why the document was required, the man with the nickname agreed to sign the document and to endorse the newsagency's stamp upon it. The transaction took a very short time. There was no question that the man with the nickname checked the publications, the costs or the amounts. He was not seen to be adding anything. This document was supplied to the Commissioner and was tendered in evidence on the hearing.
20. A second document listing almost identical publications and costs totalling $1228 was taken by the applicant to a city newsagency at a railway book store. The applicant said that he there spoke in similar terms to a woman whose name he gave and that she said ``yes you come in here a lot''. According to the applicant, she then responded to his request to sign and stamp the document he produced by going to the rear of the store to confer with one of her colleagues. When she came back a few minutes later, it was already stamped and she signed it. Again there was no evidence of any attempt to check the accuracy of the figures.
21. The lady to whom the applicant spoke at the city newsagency was called by the Commissioner to give evidence. She denied that she had ever seen the applicant and did not recognise him in the hearing room. Although she acknowledged that it was her signature and the stamp of her agency on the document, she had no recollection of seeing the contents of the document previously, let alone checking its details.
22. The document contained a number of foreign and specialised publications. The manageress said that the entry relating to the New Zealand Herald of $241 must be wrong as it had been sold at the newsagency only for about 6 weeks in 1987. It was withdrawn after that because of lack of demand. The entry relating to the Guardian of $163 must also be wrong, as it was only sold towards the end of her employment at the newsagency which finished in May 1990. An amount of $34 for a magazine entitled B & T and an amount of $194 for a foreign newspaper, the New York Post, could not be correct in her view as her agency had never sold either of those publications.
23. I have no reason to reject her evidence, particularly that part relating to the publications that were or were not sold through her business. Her evidence puts the accuracy of the whole document, and by extension, the document signed by the suburban agency, in doubt. I have no confidence that they represent a bona fide estimate of expenditure, as the applicant would have it. The inclusion of impossible titles brings into question not only the other titles but also the number and regularity of the purchases.
24. Certainly a large amount of money had been claimed for journals and newspapers. Such a claim without any element of reimbursement by the applicant's employer or any apparent attempt to obtain prior or current authorisation (through petty cash) appears inherently improbable. Some of the claims, such as the cost of newspapers which the applicant's own employing company produced, are difficult to believe. The extent of the other claims and the fact that some of them have been shown to be false, lead one to suspect the bona fides of the whole claim for newspapers and journals.
25. It is clear that the documents supplied are not in compliance with the requirements of s 82KU. The applicant seeks an exercise of ameliorating discretion under s 82KZAA(1). This, in turn, requires a consideration of the applicant's bona fides. The section is in the following terms-
(a) a taxpayer claims to have incurred an expense during a year of income; and
(b) having regard to:
(i) the nature and quality of evidence that the taxpayer has available to substantiate the claim; and
(ii) special circumstances affecting the taxpayer, including, but not limited to, the following:
(A) the extent to which the taxpayer attempted to comply with the substantiation sections;
(B) whether the taxpayer's failure to comply with the substantiation sections was inadvertent or deliberate;
the Commissioner, in the course of reviewing the claim after the making of the assessment of the taxpayer's taxable income of the year of income, is satisfied that:
(iii) the expense was incurred by the taxpayer during the year of income; and
(iv) it would be unreasonable for the substantiation sections to apply in relation to the taxpayer in relation to the expense; and
(c) the Commissioner's review is undertaken:
(i) of the Commissioner's own motion; or
(ii) in considering an objection against the assessment of the taxpayer's taxable income of the year of income; or
(iii) in considering whether to make an amendment of the assessment of the taxpayer's taxable income of the year of income in response to a request made by the taxpayer before the commencement of this section;
the substantiation sections do not apply in relation to the taxpayer in relation to the expense."
26. Having regard to the nature and quality of the evidence put forward in support of the claim for newspapers and journals, and having regard to the circumstances under which it was said to have originated, I am not satisfied that the Commissioner's discretion ought to be exercised in the applicant's favour. I would therefore affirm that part of the decision under review relating to claims for newspapers and journals of $2483.
27. The objection decision is therefore set aside and the matter is remitted to the respondent with the following directions-
- (a) The claim for the speech course of $325 should be allowed.
- (b) The claim for $440 for travelling expenses should be disallowed.
- (c) Of the claim for expenses in relation to cassette tapes and accessories, the amount of $1000 should be allowed.
- (d) The claim for $2493 newspapers and journals should be disallowed.
28. Additional tax was imposed with a culpability component of 40%. I see no reason why that rate should be varied in respect of any additional tax found to be due by the applicant. The Commissioner's own guidelines to be found in Taxation Ruling IT 2517 at paragraph 41 indicate that the component would be appropriate in cases of recklessness which are short of deliberate evasion. The manner of preparation of the papers for signature by the newsagencies, which now accounts for the majority of the disallowed claims, in my opinion falls within that description. No bona fide effort was made to ensure accuracy. At best, only rough guesses were made. No attempt was made to check whether the publications named were in fact sold by the agencies. The proprietors of the agencies appear to have been induced to sign documents which, if not entirely false, were certainly checked and signed with a degree of recklessness matching that of the applicant. However it is not the recklessness of the agents which I must take into account, but that of the applicant. His conduct amounted to more than mere carelessness. In my view, the culpability component should remain the same.
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