Decision impact statement

Ovens and Federal Commissioner of Taxation

Venue: Administrative Appeals Tribunal
Venue Reference No: 2007/2844
Judge Name: SE Frost, M
Judgment date: 13 March 2009
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Taxation
income tax
allowable deductions
home office expenses
'occupancy costs'
'running costs'
'essential character' of the expenditure
'occasion' of the expenditure
occupancy costs occasioned by home ownership, not income-producing activities
running costs occasioned by income-producing activities
car expenses
log book method
requirements that need to be satisfied
records not substantially complying with requirements
administrative penalty
failure to take reasonable care to comply with taxation law
question of remission
decisions under review mostly affirmed
some issues remitted to Commissioner

Précis

Outlines the Tax Office's response to a case which concerned deductions claimed for work related car and home office expenses and whether an administrative penalty imposed by the Commissioner for failure to take reasonable care should be remitted.

Decision Outcome:

Partially adverse

Brief summary of facts

1. The Applicant was employed as a sales manager in outplacement services. His employer provided him with an office in the city. However, due to his wife's ill health, he had a working arrangement with his employer which allowed him to work extensively at or from home, setting up what he described as a home office.

2. The Applicant also travelled extensively for his work and kept a log book for his car for a period of at least 12 weeks during the relevant year.

3. In his income tax return for the income year ended 30 June 2005, the Applicant claimed deductions for work related car expenses and other work related expenses (in relation to the home office).

4. The Commissioner considered that the expenditure claimed by the Applicant in relation to his home office fell into two broad categories: 'occupancy costs' and 'running costs'.

5. 'Occupancy costs' included a portion of the interest charged on the Applicant's home mortgage, a portion of the home building insurance premiums, a portion of the amount of local council rates and water rates paid, and costs relating to repairs and maintenance of the home (including painting).

6. 'Running costs' included items of expenditure such as a portion of the household gas and electricity bills, a portion of the household contents insurance premiums, a portion of the telephone bills, and depreciation on furniture, equipment, carpets, etc.

7. The Commissioner disallowed the Applicant's claims for the home office occupancy costs but accepted that some of the running costs were deductible. The Commissioner disallowed the Applicant's claim for car expenses as he was not satisfied that the log book accurately reflected the use that the Applicant had made of his car for income-producing activities. The Commissioner also imposed administrative penalties pursuant to section 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) at 25% of the shortfall amount for failure to take reasonable care to comply with a taxation law.

Issues decided by the tribunal

1. Home office expenses

•

The Tribunal found that the Applicant used his home office for income-producing purposes but the question to be asked in relation to the Applicant's entitlement to deductions for the home office was 'is the occasion of the outgoings found in whatever is productive of actual or expected income?'

'Occupancy costs

•

The Tribunal found that the occasion of the 'occupancy costs' is not to be found in the work that the Applicant undertook in his home office, as there was no nexus between the occasion of the Applicant's expenses to his income-producing activity.

•

At paragraph 48, Member Frost states: 'It was not by reason of his working in the home office so as to earn income that Mr Ovens incurred the various items of expenditure described as "occupancy costs". Those items of expenditure - in their entirety - were incurred by reason of his and his wife's ownership of the home. They were incidents of home ownership, and of the desire (or need) to insure their family home. Mr Ovens is not entitled to a deduction for "occupancy costs"'.

'Running costs'

•

At paragraph 51, the Tribunal found that the 'running costs' are items of expenditure, the occasion of which is the work that Mr Ovens undertook in his home office. It is by reason of his working in the home office that he would switch on the gas heater in that area. It is by reason of his working in the home office that he would turn on the lights, and consume electricity through the use of the various items of electronic equipment that he had deployed in that room. It is by reason of his working in the home office that he incurred that part of his home contents insurance expenditure that related to the equipment in his office.'

•

However, the Tribunal found that in some cases, the proportion of an item of expenditure claimed was excessive. Accordingly, the Tribunal only allowed part of the deduction claimed for those items, to be recalculated by the Commissioner (ie electricity, gas and household contents insurance).

Depreciation

•

The Commissioner disallowed the Applicant's claims for depreciation in relation to a notebook, a fax machine and a pocket PC.

•

The Tribunal found that the percentages claimed by the Applicant of use of each of the items were reasonable. However, there was some confusion over the amounts allowable for depreciation.

•

The Tribunal remitted the items to the Commissioner to allow the Applicant further time to quantify his claims.

2. Car expenses - the "log book" method

•

The Tribunal was not satisfied that the Applicant's log book complied with the requirements of section 28-125(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore found that the Applicant could not use the log book method to claim his car expenses for the relevant year.

•

The Commissioner had indicated a preparedness to accept a claim based on whichever of the other methods set out in Division 28 is of greatest advantage to Mr Ovens. The Tribunal remitted the matter back to the Commissioner to allow that to be done.

3. Penalty

•

Administrative penalties were imposed on the Applicant by the Commissioner at 25% of the shortfall amount, for a failure to take reasonable care to comply with a taxation law. The "statements" were in respect of:

(i)

the claim for deductions in relation to 'occupancy costs' of the home office;

(ii)

the claim for deductions in relation to 'running costs' of the home office;

(iii)

the claim for depreciation in respect of equipment in the home office; and

(iv)

the claim for car expenses based on the log book method.

•

The Tribunal found that the base penalty amount of 25% was appropriate in relation to matters (ii) to (iv).

•

However, in relation to matter (i), the Tribunal found that the Applicant and his agent, to some extent, took reasonable care in making the statement that he was entitled to a deduction for 'occupancy costs'.

•

At paragraph 103, the Tribunal said that: '... Mr Ovens and his agent took reasonable care in making the statements (even though I have found the statements to be wrong) that he was entitled to a deduction for those items of expenditure set out at [49] of these reasons, provided that the amount claimed in relation to his employment was no more than 11% of the total expenditure for the particular item. If more than 11% was claimed in his return, then it is not the case that Mr Ovens and his agent took reasonable care in making the statement.'

•

The administrative penalty matter was remitted to the Commissioner for recalculation in accordance with the following directions:

(a)

As to any item in respect of which the claim for deduction in Mr Ovens' tax return did not exceed 11% of the total expenditure for that item - no penalty imposed because of the exception in section 284-215(2) of Schedule 1 to the TAA 1953; and

(b)

As to any item in respect of which the claim for deduction in Mr Ovens' tax return exceeded 11% of the total expenditure for that item - administrative penalty at 25% of the shortfall amount arising from the percentage claimed in excess of 11%, with no remission.

Summary

•

Objection decisions affirmed, except to the following extent:

(a)

Certain home office expenses allowed, as set out in [53] - to be recalculated by the Commissioner;

(b)

Depreciation claims as set out in [55] and [56] - for reconsideration by the Commissioner, taxpayer allowed 21 days to provide further information;

(c)

Car expenses - for reconsideration by the Commissioner, with a direction that Mr Ovens cannot rely on the log book method;

(d)

Administrative penalty - for recalculation by the Commissioner, in relation to 'occupancy costs', in accordance with [104].

Tax Office view of Decision

Based on the facts found by the Tribunal, the decision is consistent with established general principles of deductibility under section 8-1 and Division 40 of the ITAA 1997, in relation to expenses incurred by employees.

In addition, it was open to the Tribunal to make its findings and partially remit the penalty in respect of the home office 'occupancy costs'.

Administrative Treatment

List of Rulings and Determinations Affected

None

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Court citation:
[2009] AATA 166
2009 ATC 10-081
75 ATR 479

Legislative References:
Income Tax Assessment Act 1997
8-1
28-12
28-90
28-100
28-110
28-125

Taxation Administration Act 1953
284-75
284-80
284-90
298-20

Case References:
Ronpibon Tin NL v Federal Commissioner of Taxation
[1949] HCA 15
78 CLR 74
8 ATD 431

Handley v Commissioner of Taxation
81 ATC 4165
148 CLR 183
11 ATR 644

Commissioner of Taxation v Forsyth
81 ATC 4157
148 CLR 203
11 ATR 657

Swinford v Commissioner of Taxation
84 ATC 4803
[1984] 3 NSWLR 118
15 ATR 1154

Lunney v Federal Commissioner of Taxation
100 CLR 478
11 ATD 404
[1958] HCA 5

Commissioner of Taxation v Brixius
16 FCR 359
19 ATR 506
87 ATC 4963

Fletcher v Federal Commissioner of Taxation
173 CLR 1
22 ATR 613
91 ATC 4950

Macquarie Finance Limited v Commissioner of Taxation
2004 ATC 4866
[2004] FCA 1170
57 ATR 115

Spriggs v Federal Commissioner of Taxation
[2007] FCA 1817
68 ATR 740
2007 ATC 5280

Commissioner of Taxation v Day
[2008] HCA 53
70 ATR 14
2008 ATC 20-064

Commissioner of Taxation v Payne
202 CLR 93
46 ATR 228
2001 ATC 4027