CASE 7/94

Members:
BH Pascoe M

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 January 1994

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BH Pascoe (Member)

This is an application to review a decision by the Commissioner of Taxation to disallow in part an objection lodged by the applicant against an amended assessment of income tax in respect of the year ended 30 June 1989 and which was issued on 23 April 1992.

2. The amounts in dispute relate to claims for deductions made by the applicant in his return of income for the year ended 30 June 1989 in respect of home office expenses and motor vehicle expenses. An amount of $1,928 was claimed as expenses of the home office being one-eighth of expenditure incurred on cleaning, mortgage interest and charges, insurance, gas and electricity and rates. The respondent disallowed $1,731 of the claim. An amount of $22,882 was claimed for motor vehicle expenses and the respondent disallowed $7,272 of the claim. In addition to seeking a review of the decision not to allow these amounts as deduction, the applicant seeks a review of the decision to impose additional tax for an incorrect return.

3. The applicant is a medical practitioner practising as a consultant physician specialising in neurology. Fifty per cent of each week is devoted to private practice conducted in consulting rooms rented on a sessional basis at three different hospitals. The other fifty per cent of each week is occupied under a contractual appointment at a public hospital. The rooms rented for private practice are basic consulting rooms and the applicant has exclusive use only within the specific hours agreed. In each case the hospital provides reception staff for bookings and to prepare patient history folders. No accounting or typing assistance is provided nor space for filing or storage. The applicant maintains his practice records, patient records and all administrative facilities at rooms set aside at his residence.

4. The applicant conducts his practice through an incorporated medical practice company by which he is employed. The applicant's wife is also employed by the practice company as a secretary and practice manager for an average of 24 hours per week and she carries out her duties solely at the residence.

5. It was agreed by the parties that the Tribunal should view the residential premises. Unfortunately the applicant now lives at a different location to that occupied in the year to which the disputed claims relate and only the current premises were inspected. Floor plans of the previous residence were provided in evidence.

6. The only witness to give evidence during the hearing was the applicant himself. He stated that he required a central location at which he could retain patient files, review and prepare reports and make telephone calls to patients, hospitals and other doctors which could not be arranged during sessions at the hospitals. He was actively involved in research and much of the reading and preparation of written material was done at the home office. Part of the responsibilities under the hospital contractual appointment involved preparation of lectures and clinical presentations much of which was done at the home office. In both the residence occupied in the relevant year and the one occupied currently, two rooms were set aside for use within the practice. One contained the patient and administration records and computer equipment and was primarily used by the secretary. The other room was primarily used by the applicant and was equipped with tables, chairs, some filing cabinets, an X-ray viewing screen and sundry small items of equipment. In the residence occupied in the relevant year both rooms were adjoining and located on the lower floor of a two storey house through which it was necessary to enter for access between garage and the residential area upstairs. The two rooms in the current residence are at some distance from each other, one being downstairs and the other upstairs. The applicant normally spends between one and two hours each week night in his study and some hours during the weekend, averaging 12 to 13 hours

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per week performing the duties outlined in his study.

7. The amounts claimed by the applicant and the amounts allowed by the respondent in respect of the relevant year were:

                                   Claimed          Allowed

  Cleaning                           1,014              402
  Mortgage interest
     & charges                      11,129              nil
  Insurance                            722              nil
  Gas and electricity                1,296            1,296
  Rates                              1,265              nil
                                    ------            -----
                                    15,426            1,698
                                    ------            -----
  Claim one-eighth                   1,928              212
                                    ------            -----
      

The adjustment to the claim for cleaning expense was the result of the view that only $402 worth of receipts complied with the substantiation provisions. The respondent also took the view that the home office should not be classed as a place of business and no part of the claim for interest, insurance of rates should be allowed.

8. The adjustment of the claim for motor vehicle expenses was made to reduce the percentage of the total motor vehicle expenses from the 94 per cent claimed to 64 per cent. This was on the basis that the 30 per cent related to travel from home to the hospital and return.

9. It was argued by Mr B. Flood, for the applicant, that the home was also the place of business of the applicant. It was said that the applicant and his assistant work at the home office because that is where the practice is based, that is the location where patient and billing records are located and no other premises are available to the applicant. It was sought to distinguish the decisions in
Handley v FC of T 81 ATC 4165; (1980-1981) 148 CLR 182;
FC of T v Forsyth 81 ATC 4157; (1980-1981) 148 CLR 203;
FC of T v Faichney 72 ATC 4245; (1972) 129 CLR 38 and
Thomas v FC of T 72 ATC 4094; (1972) 46 ALJR 397 which were all decisions of the High Court relating to deductions for home office expenses.

10. For the respondent, Mr Halls submitted that the deductions claimed related to what was, pure and simple, a home office and the decisions of the High Court in the cases mentioned above are applicable to the circumstances of this case.

11. It is likely that, between them, the two representatives in their submissions referred the Tribunal to every decision of the Boards of Review, this Tribunal and the Courts over the past 20 years which dealt with claims for home office expenses. It is not considered discourteous to the parties that the majority of these decisions are not referred to. It is considered appropriate to use as a starting point the decision in Handley's case (supra). This was the second of two cases decided by the Full High Court in close proximity to each other. Both cases involved claims for expenditure incurred in respect of home office by barristers. The majority chose to adopt the expression used in
Lunney v FC of T (1958) 11 ATD 404; (1958) 100 CLR 478 of the ``essential character of the expenditure''. In his decision in Handley's case (supra), Mason J stated (at ATC page 4171; CLR pages 193 and 194):

``Reflection on the argument presented by Mr. Priestley Q.C. for the appellant has not persuaded me that the decision in Thomas v. FC of T 72 ATC 4094; (1972) 46 ALJR 397 and FC of T v Faichney 72 ATC 4245; (1972) 129 CLR 38 were wrong or that they were incorrectly based on a view that outgoings by way of interest were `of a capital, private or domestic nature' within the meaning of sec. 51(1).

It is because the study in these cases and the case now under consideration, despite its predominant use for the purposes of the taxpayer's profession or employment, remains an integral part of the home that expenditure referable to it is an outgoing having the character described. Here the study is a room in the taxpayer's home, not separate from it in any way, having no distinctive physical characteristics, readily capable of other use for family purposes, and in fact used for non-professional purposes from time to time. Moreover when used for professional work it is ordinarily used only for professional work that can be done at home, in the evenings and at weekends, e.g. working on briefs and preparing opinions. Expenditure related to the study is therefore referable to the home. The `essential character of the expenditure', to take up the expression used in Lunney v FC of T (1958) 100 CLR 478 at p. 497 is therefore that of a `capital, private or domestic nature'.''

and later (at ATC pages 4171-4172; CLR page 194):

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``I do not agree that in determining the `essential character of the expenditure' we should look only to the use to which the study is put, though use is obviously a matter of great importance. It is necessary to look to the character of what is said to have been acquired by means of the expenditure, namely the study, and to its relationship to the home of which it forms part, in order to decide whether the expenditure falls within the exception.

The outgoings consisted of interest payable on moneys borrowed to purchase a home. The fact that the home included a study and that the taxpayer proposed to use the study predominantly for professional purposes are quite consistent with the expenditure being of a capital, private or domestic nature.''

12. It was argued for the applicant that the facts in this application can be distinguished from those in Handley where the plaintiff, in that case, had professional chambers available to him. Here, it was said, the applicant had no other place of business, he does not work at home as a matter of convenience but because that is where the practice is based. Support for the view that the decision in Handley's case did not produce the result that under no circumstances could a taxpayer obtain a deduction for any part of interest or rates incurred in relation to property which provided the taxpayer with residential accommodation was sought in the decision of the Supreme Court of New South Wales in the case of
Swinford v FC of T 84 ATC 4803. This case concerned the claim for deduction of a proportion of rent paid by a self-employed script writer for a two-bedroom flat when one bedroom was dedicated to writing activities. The only time the taxpayer worked out of the room was to attend rehearsals of episodes she had written, to deliver scripts and to collect story line synopses. She also considered it necessary to watch some Australian television drama in her lounge room. The taxpayer was successful in this case. David Hunt J said (at page 4806):

``The Commissioner's first submission was that, following the decisions of the High Court in Handley v F.C. of T. 81 ATC 4165; (1981) 148 C.L.R. 182, F.C. of T. v Forsyth 81 ATC 4157; (1981) 148 C.L.R. 203, deductions are no longer available, as a matter of law, in relation to that proportion of the rent or of the interest on mortgages paid by a taxpayer which relate to a home office. Excepted from that proposition, as I understood it, would be a doctor's surgery where the room in which that surgery is situated is physically separate from the house or it has distinctive physical characteristics which do not readily permit it to be used for private or domestic purposes.

What the High Court was dealing with in Handley and in Forsyth was in each case a study in the taxpayer's home (ignoring the family trust in the latter case) which the taxpayer (who also maintained chambers in the city) used for professional work of the type which could ordinarily be done at home and which was in fact done at home rather than in his chambers only as a matter of convenience. The `essential characteristic of the expenditure' (Lunney v F.C. of T. (1958) 100 C.L.R. 478 at p. 497) was therefore in each case held to be that of a private or domestic nature and thus excluded for that reason by the express terms of sec. 51(1): Handley at ATC pp. 4171-4173, 4175; C.L.R. pp. 194, 196-197, 201 and Forsyth at ATC pp. 4163-4164; C.L.R. p. 215.

There can be no doubt that, as a result of those two cases, it will be difficult (perhaps impossible) for any taxpayer to obtain a deduction where his home office is a study used in those circumstances. It is, however, to take a very large step further to say that, as a result of those decisions, no deduction will be available in relation to a home office as a matter of law. As Mason J. said in Handley (at ATC p. 4172; C.L.R. p. 195), there is an infinite variety of factual situations to which sec. 51(1) may apply. I suspect that we are dealing here more with words than ideas (or propositions of law). In my view, the accuracy of the Commissioner's submission depends upon what is meant by a `home office'. The area designated as such, it seems to me, may either constitute business premises notwithstanding the physical association of that area with the taxpayer's home, or it may be only part of the taxpayer's home (such as a study) used for business purposes as a matter of convenience. Whilst in most cases a home office will not constitute business premises unless, like the doctor's surgery, it is physically distinct from the area used as a

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home, l would not be prepared to say that a home office cannot, as a matter of law, amount to business premises.

The present case, in my opinion, is clearly distinguishable from what was being considered in Handley and in Forsyth. The work done by the taxpayer in the present case was not done at her home rather than elsewhere as a matter of convenience. This was the only place where she did carry out her writing activities. This was the base, and the only base, of the taxpayer's operation:''

13. In this case the home was not the only place where the applicant conducted his practice. Whilst it may have been the central base where he retained files, patient records, etc, it would be stretching the description of a ``place of business'' to say that he carried on a business at his home address. Much of what was done by him in the study at home was little more than many busy professional practitioners do after returning home each night, reviewing the day's results, making telephone calls which could not be made conveniently during the day, pursuing research activities etc. The secretarial and practice management activities carried on by the applicant's wife at the residence were performed by her as an employee of the practice company not of the applicant. Mr Flood sought to argue that the applicant incurred part of the expenditure in the provision of an office in his capacity as a major shareholder, director and employee of the company to enable the company to derive its assessable income which ultimately, found its way back in the hands of the applicant as salary. Whilst recognising that the establishment of practice companies by medical practitioners is done primarily for the purpose of maximising superannuation deductions and many regard them as having a somewhat artificial existence, they are separate legal entities and the medical practitioner derives salary income. The argument produced to establish a necessary nexus, particularly under the first limb of section 51(1) of the Income Tax Assessment Act 1936 (``the Act''), between the expenditure incurred in making an office available for use by the company and the derivation of salary income is somewhat tenuous. Whilst not regarding the argument as failing completely, the separation of the practice company from the applicant is a factor in seeking to establish whether this applicant's circumstances place him at the end of a scale which indicates that the premises are a place of business or at the end of the scale which indicates that the premises are primarily a home in which some professional activities are conducted.

14. In this case I am satisfied that the essential character of the expenditure on mortgage interest, insurance and rates incurred by the taxpayer was for the provision of a home for his family and would categorise the study in the same light as that considered by Mason J in
FC of T v Faichney 72 ATC 4245; (1972) 129 CLR 38 where he said (at ATC pages 4248-4249; CLR page 43):

``... a study in a taxpayer's home, no matter how great the extent of its dedication in point of use to the pursuit of those activities from which the taxpayer earns his income, is a part of that home.''

No evidence was led as to the amount of the deduction claimed for cleaning expenses which was disallowed by the respondent. It follows that the decision of the respondent in relation to home office expenses is affirmed.

15. The other matter in dispute was the deduction claimed for motor vehicle expenses. The argument put for the applicant was, in part, related to the argument put in favour of him being seen as having his place of business at his home and therefore the respondent's disallowance on the basis of the cost of travelling from home to another place of business was incorrect. An additional factor put in favour of the deduction was the need of the applicant to carry heavy and bulky equipment with him in his motor vehicle when travelling to and from each of the locations at which he saw patients. The applicant gave evidence that he was required to carry with him on a daily basis electrodiagnostic equipment known as an EMG machine, a camera bag in which were kept various instruments and small items, a brief case, relevant files for the patients to be seen on that day, X-rays relevant to those patients and frequently, medical journals and text books relevant to a particular patient illness. The EMG machine weighs 15 kilograms and its dimensions are 175 millimetres by 455 millimetres by 380 millimetres. It was argued that the applicant's position was analogous to the taxpayer in
FC of T v Vogt 75 ATC 4073. In that case the taxpayer was a professional musician who worked at a suburban RSL Club and also earned small amounts from playing at

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a recording studio and at a musicians' club. In general the taxpayer kept his musical instruments and their associated equipment (trumpet, flugelhorn, acoustic bass, electric bass and amplifiers) at home. He did so because it was essential to practise on them and because it was the only practicable place to keep them. He used his motor vehicle to transport himself and his instruments between his place of residence and the various places where he worked. The taxpayer was successful in his claim for the relevant motor vehicle expenses.

16. In my view the applicant in this case should also succeed in his claim for the additional motor vehicle expenses disallowed by the respondent. Whilst finding that his home office was not sufficiently ``a place of business'' so as to allow a deduction for a proportion of that expenditure which was essentially incurred in order to provide a home, the home is, nevertheless, his central base from which he travels to various locations to see patients. In none of those other locations is provided facilities for retention of records or equipment and, each day, he invariably goes to a location different from the one that he was attending the day before. In many respects his position was similar to that of the taxpayer in
FC of T v Wiener 78 ATC 4006 where the itinerant nature of the duties made travel essential and Smith J considered that the taxpayer could be said to be travelling in the performance of her duties from the moment of leaving home to the moment of returning there. In any event, the necessity to carry the bulky equipment. files, etc to and from his home each day brings this applicant within the principle established in Vogt's case (supra). There was no dispute as to the quantum in relation to the claim for motor vehicle expenses and, therefore, the respondent's decision in relation to the claim for their expenses should be set aside and a further deduction of $7,272 allowed in the relevant year.

17. The final issue in dispute related to the imposition of additional tax. The amended assessment in respect of the year ended 30 June 1989 resulted from a request made by the respondent by letter of 22 May 1991 for the applicant to provide documentary evidence to substantiate 19 items of expenditure claimed as deductions in that year. The result of this desk audit was the disallowance of the following items.

   Bank charges                  104
   Home office expenses        1,731
   Subscriptions                  48
   Motor vehicle expenses      7,272
   Tax Agent fees                190
                               -----
                               9,345
                               -----
      

Culpability penalties were imposed at the rate of 5 per cent on the tax applicable to the disallowance of motor vehicle expenses and the interest rates and insurance content of the home office expenses and at the rate of 15 per cent on the tax applicable to the disallowance of subscriptions and tax agent's fees. Both of the latter items were found to have been related to the taxpayer's wife and the respondent took the view that these items had been claimed through carelessness. I have been given no reason to regard this penalty as excessive. Given my findings in relation to motor vehicle expenses the only remaining penalty for consideration is that imposed relative to the disallowance of home office expenses. The report of the auditor when recommending penalties argued that the applicant had made a false and misleading statement and regarded as a material factor the failure of the applicant to state in the return lodged that he did not see patients at his home office. Given the difficulty I have had in determining at which end of the scale this expenditure falls, the clearly arguable position taken by the applicant and the relatively small amount left unsatisfied after the desk audit I do not regard the imposition of a culpability penalty relative to the ultimate disallowance of the claim for home office expenses as justified. The per annum component, similar to an interest charge, of the additional tax is clearly appropriate and this will require adjustment to give effect to this decision.

18. The decision of the respondent is set aside and in substitution therefore the objection by the applicant is allowed to the extent of allowing a deduction of $7,272 for motor vehicle expenditure and the remission of any culpability penalty applicable to the disallowance of the claim for home office expenses.