Income Tax Assessment Act 1936, s51(1), s223(1), s226G.

Amalgamated Zinc (de Bavay's) Ltd v Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295

Case 27 12 CTBR 397

Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344

Federal Commissioner of Taxation v Collings 76 ATC 4254

Federal Commissioner of Taxation v Cooper [1991] FCA 164; (1991) 21 ATR 1616, 91 ATC 4396

Federal Commissioner of Taxation v Finn [1961] HCA 61; (1961) 106 CLR 60

Federal Commissioner of Taxation v Genys (1987) 17 FCR 495

Federal Commissioner of Taxation v Green [1950] HCA 20; (1950) 81 CLR 313

Federal Commissioner of Taxation v Riverside Road Pty Ltd (in Liq) (1990) 21 ATR 885, 90 ATC 4567

Federal Commissioner of Taxation v Smith [1981] HCA 10; (1981) 147 CLR 578

Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 9 ATR 885

Federal Commissioner of Taxation v Vogt 75 ATC 4073

Federal Commissioner of Taxation v Wiener 78 ATC 4006

Garrett v Federal Commissioner of Taxation 82 ATC 4060

Horton v Young [1972] Ch 157

In Re The Income Tax Acts (1903) 29 VLR 299

John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30

John v Federal Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417

Lodge v Federal Commissioner of Taxation [1972] HCA 49; (1972) 128 CLR 171

Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478

Owen v Pook (1970) AC 244

Ronpibon Tin NL & Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47

Taylor v Provan [1975] AC 194

W Neville & Co v Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 CLR 290

1. INTRODUCTORY
   • (a) The Applicant sought the review of a decision by the Respondent disallowing an objection by the Applicant to amended assessments issued on 13 December 1995, in respect of the income tax years ended 30 June 1991 to 1994 inclusive (the 'relevant years'). The issues in respect of each of the relevant years are identical.
   • (b) The issues are as follows:
     • (i) whether the Applicant is entitled to claim as a deduction, expenses incurred by him in travelling between the place where he both carries on the business of deer farming and where he and his family reside, and the place where his employment as a pilot is based, which is the airport of a major city;
     • (ii) the extent to which penalty tax imposed by the Respondent in respect of the claimed deductions is appropriate.
   • (c) It is to be noted that there is no dispute as to the correctness of the amounts claimed as a deduction. These amounts are as follows: 1991 - $2,092; 1992 - $2,988; 1993 - $5,337; and 1994 - $5,093.

The hearing took place on 11 March 1997. The Applicant was represented by Mr D. McGovern of counsel, instructed by Ian Parker Accounting Pty Ltd, and the Respondent was represented by Mr M. Roope, an officer of the Respondent. The Tribunal received into evidence the documents lodged pursuant to s37 of the Administrative Tribunal Act 1975 (the "T Documents"), in addition to certain exhibits. Exhibit A1 is a letter from the Applicant's employer describing the Applicant's position as a permanent, full-time employee; Exhibits A2 to A5 are copies of the Applicant's income tax returns for the relevant years; Exhibit A6 is a letter sent by the Applicant to the Respondent in 1991 requesting an interpretation of the law with respect to a matter irrelevant to the present proceedings (submitted for the purpose of addressing the penalty issue); Exhibit A7 is a letter dated 12 March 1992 from the Respondent to the Applicant in reply to the letter in Exhibit A6; Exhibit A8 is a video prepared by the Applicant in respect of the deer farm and the residence on the property, which was shown before the Tribunal at the hearing; Exhibits A9 and A10 are a witness statement and supplementary statement (respectively) made by the Applicant. The Applicant also gave sworn evidence elaborating on the witness and supplementary statements and which included a narrative accompanying the Exhibit A8 video.

1. THE FACTS AS FOUND BY THE TRIBUNAL
   • (a) The facts were not in dispute. The Applicant resides with his family on a grazing and farming property (for the purposes of these Reasons referred to as 'the property') where he carries out activities associated with the farming of deer. The Applicant is also a pilot employed by a large commercial airline ('the airline') which is based at the central airport of a major city ('the airport'). During the relevant years the Applicant travelled by various means, including car, bus, train and commercial aircraft between the property and the airport.

(b) The property was acquired by the Applicant in 1987. He also in that year designed and assisted in the construction of a dwelling on the property in which he and his family have lived until the present. The property was first utilised for the grazing of cattle, but in consequence of a drought and the depressed state of the cattle market the Applicant decided to farm deer. In early 1991 the Applicant began erecting the structures necessary in order to raise and run red deer. The Applicant increased the number of dams and troughs on the property and personally constructed a deer shed as well as a novel and intricate system of fences, laneways and gates designed to control the movement of the deer using their own natural instincts. The Applicant's first red deer hinds arrived at the property towards the end of 1991.

(c) It should be noted that there was no suggestion by the Respondent that the period between 1 July 1990 and the date of commencement of activities associated with deer farming should be treated in any way differently from the remainder of that relevant year for the purpose of the case.

(d) The Applicant, in the relevant years, had the occasional assistance of a worker but carried out most of the tasks necessary for the successful running of the farm single-handedly. These tasks included, to name but a few, the erection of fencing, the cultivation of grazing crop, the supplementary feeding of the deer, the removal of antler (called 'velveting'), herd observation and the recording of information for genealogical purposes, general farm maintenance, and the marketing and sale of both live and culled stock as well as antler. Income is derived from these sales as well as from the rental of stags. Each of these activities, and especially the velveting, are dependent on the Applicant's experience and acquired expertise.

(e) It is clear from the evidence that the Applicant's farming operation is a considerable undertaking, carefully structured, conscientiously managed, deriving substantial gross income, and requiring the dedication of much time, skill, and experience. It is apt then, that the Respondent did not dispute that the deer farming activities of the Applicant amounted to the carrying on of a business, and that the property was a place of business.

(f) The Applicant is also employed as a pilot. By the beginning of the relevant years he had amassed a number of years experience with the airline and had achieved the rank of captain. He has for many years commanded the control of international flights.

(g) He is able to devote towards his property the considerable time necessary in order to meet the demands of deer farming as well as fulfil the requirements of his airline employment by virtue of a route allocation system utilised by the airline company. The airline company issues in advance its routes for a period of 56 days and crew members bid for the available routes. Seniority determines whether a crew member secures a particular choice. In order to meet the requirements for full-time employment each pilot must work about 175 hours in every 56 day period. Night flying is given a weighted credit, whereas the hours not actually at the controls but nonetheless whilst still at work (for example while awaiting the return journey) are credited at a rate of six hours for every 24. Due to his relative seniority and because he bids for routes which are not commonly desirable, the Applicant can regularly secure the routes (usually involving night flying and minimum time away from the controls) which allow him to fill the obligatory quota of flying time but which minimise the actual hours required in order to do so. Thus the Applicant, whose average 'hours' are between 175 and 190 in each 56 day period, can often fulfil this quota in a period of 23 to 25 days. This leaves him in excess of 30 days in the 56 day period which he can devote to the deer farm. In weekly terms, he is usually able to organise his flying duties such that he is absent from the farm for about three days in a week, and present at the farm for the remainder of the seven day period. On the occasions where the Applicant is not able to secure his preferred flying duty (he is, in his words, "only reasonably senior"), there is nonetheless a significant remainder of the 56 day period which is available to him for concentration on his farming responsibilities at the property.

(h) The Applicant also performs stand-by duty. When that occurs the Applicant has to be available for summons on short notice to the airport, to which destination he must arrive within three hours of the call. In order to minimise the risk of being called from the property on short notice the Applicant, when placed on stand-by, usually travels to and stays in the vicinity of the airport for the duration of the stand-by period. Occasionally the Applicant remains at the property whilst on stand-by, and in the event that he is called to the airport, he charters an aeroplane for the purpose of travelling to the airport. Because of his seniority, however, he is placed on stand-by duty occasionally, usually once in every two or three 56 day periods; and on one occasion only during the relevant years, whilst on stand-by, did he charter an aeroplane in order to attend the airport from the property.

(i) It is accepted by the Tribunal that the Applicant is employed in a full-time capacity with the airline.

(j) In the usual course during the relevant years, the Applicant would, on the days he was due to report at the airport for flying duties, travel to the airport using a car, bus and train. When he had to attend training duties or medical checks at the airport and on the one occasion when he was called from the property to the airport whilst on stand-by, he travelled by means of aircraft, train, bus and motor car. The Applicant travelled from the property to the airport approximately 40 to 50 times during each of the relevant years.

(k) The Applicant claimed (and this was not disputed) that his routine remained essentially uniform, involving his engagement in the activities of the farm immediately prior to and whilst leaving the property in order to travel to the airport. In the words of the Applicant (Supplementary Statement, p 2):

If I was required to leave [the property] early in the morning to travel to [the airport] I would first engage in the farm activities required of me around the farm. Even in the actual process of leaving the farm I would engage in assessment of current conditions and inspect the herd from time to time. Much to my wife's chagrin I used to occasionally inspect the herd wearing my ... pilot's uniform.

The Tribunal was not furnished with precise evidence as to the frequency with which the Applicant was in fact required to leave the property in the morning; however the Tribunal is satisfied, having accepted that the Applicant's routine was generally constant, that this occurred regularly.

(l) The Applicant gave evidence that he also attended to farming activities immediately upon arrival at the property when returning from the airport.

• (m) When travelling to the airport the Applicant was required to carry with him various items of equipment, uniform and documentation pertaining to his employment as a pilot.

(n) The Applicant also gave evidence that whilst away from Australia and in a foreign port awaiting the return flight, during what would otherwise be 'leisure time', it was his practice to carry out work associated with his deer farm. These activities included various management tasks such as the planning of farm projects, the analysis of livestock data and farm records, correspondence, and the study of farming practices and applications.

(a) The Applicant claims a deduction of the expenses incurred in travelling between the property and the airport under the provisions of s51(1) of the Income Tax Assessment Act 1936 ('the Act').

(b) It should be noted that the Applicant does not rely, as grounds for the deductibility of his travelling expenses, on the fact that he does paper work associated with the farm while overseas, on the fact that he is occasionally on stand-by duty, and or on the basis that he carries equipment with him while travelling. The Applicant's claim is founded solely on the fact that his travel is between a place of business and a place of employment.

(c) The Applicant's argument in this respect is that any travel between two places of work, or between a place of business and a place of employment, regardless of whether they are related to each other, is an allowable deduction under s51(1). In addressing the concern of the relationship between the business and the employment Mr McGovern, for the Applicant, argued that the relevant focus is on the scope of the income earning activities. Once it is seen, Mr McGovern argued, that the scope of the Applicant's income earning activities embraces both the derivation of income from the farming activities and also from the employment as a pilot, it follows that the travel between one and the other is an activity which is in the course of gaining or producing the assessable income, when viewed as an entirety, and therefore within the requirement of the sub-section.

(d) Moreover it was argued that the residence on the property was merely incidental to the fact that it was a place of business, and that the fact that the Applicant lived there does not alter the nature or the character of the journeys to and fro as journeys between two places of income production. The Applicant cited, amongst others, the cases of Federal Commissioner of Taxation v Green [1950] HCA 20; (1950) 81 CLR 313 and Garrett v Federal Commissioner of Taxation 82 ATC 4060, (1982) 12 ATR 684 in support of his argument.

(e) On the other hand, the Respondent argues that the travel is an activity which occurs prior in time to the engaging in any operation which earns income. Mr Roope argued for the Respondent that the travel expenses were not a part of the costs of running the deer farm business, and that they were also not incurred in the performance of the Applicant's duties as a pilot, and as such were not expenses incurred in gaining or producing assessable income.

(f) Moreover, it was argued that the travel was for the purpose of simply transporting the Applicant to and from the base of his employment and the place where he resided, which was an unrelated place of business, and was therefore, on the authority of Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478 (hereafter "Lunney") essentially of a 'private' nature, thus falling foul of the exclusionary provisions of s51(1).

1. DEDUCTIONS UNDER S51(1): GENERAL COMMENTS
   • (a) Section 51(1) is in the following 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.

In order to qualify for a deduction under the subsection it must be shown that the relevant expense is either "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business" for that purpose (often referred to as the 'positive limbs' of the section), and that it is not excluded because it is a capital, private or domestic expense, or an expense which is productive of exempt income (often referred to as the 'negative limbs' of the section).

(b) It should be noted at the outset that the Applicant in this case did not seek to rely on any independent operation of the second positive limb of s51(1), namely that the travelling expenses were necessarily incurred in carrying out his farming business. Given the expansive meaning attributed to the first limb (Ronpibon Tin NL & Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 at 56, hereafter "Ronpibon"; Lodge v Federal Commissioner of Taxation [1972] HCA 49; (1972) 128 CLR 171 at 174, per Mason J), and the consequently restricted independent scope of the second limb (John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 at 40, per Fullagar J) this course was appropriate (see also Case P6 82 ATC 30 at 32).

(c) The terms of s51(1) have been considered at length by the courts. Comprehensive expositions of the construction given to the section can be found in Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 9 ATR 885 at 888-9, per Lockhart J and in the judgment of the Full Court of the Federal Court in Federal Commissioner of Taxation v Riverside Road Pty Ltd (in Liq) (1990) 21 ATR 885, 90 ATC 4567. See also D Russell QC, "Sub-section 51(1): Disquieting Trends in the Courts", (1995) 2 Taxation in Australia: Red Edition 161; and RH Woellner, TJ Vella, L Burns, S Barkoczy, Australian Taxation Law, (6th edition, 1996) p 676ff. Despite the extensive attention which the subsection has received, the comments set out hereafter in this clause 5 may be appropriate.

(d) Although there is range of expenses which are applied ultimately towards the gaining of income, not all of them will be considered as falling within the words 'incurred in gaining or producing' assessable income. Thus the provisions of the subsection are deceptive in their simplicity, because they mask the limitations inherent in the concepts which give life to the words. One such concept is that there must be a proximity (not used here in a temporal sense: Federal Commissioner of Taxation v Finn [1961] HCA 61; (1961) 106 CLR 60 at 68, per Dixon CJ) or a 'sufficient nexus' between the loss or outgoing and the assessable income; the limitation implied by the words 'in gaining or producing', which have been explained to mean "in the course of gaining or producing" (Amalgamated Zinc (de Bavay's) Ltd v Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 at 303, 309; Ronpibon, supra, at 56-7). The leading expression of this limitation was handed down by the High Court in Ronpibon, supra: (at 57)

... to come within the initial part of the sub-section 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.

This passage explains that the 'occasion' of the loss or outgoing, in other words, the event or activity which the loss or outgoing brings about, must be (or expected to be) 'productive' of assessable income.

(e) The exact extent of the limitation, however, has not been (and having regard to the generality of the provision, probably never can be) definitively determined. In particular, there is the issue as to how far back in the causal chain the activities which lead to the gaining of assessable income (and therefore in a causal sense still 'productive' of assessable income) will nonetheless cease to provide the grounds for a deduction.

(f) It is as a result of this difficulty as to precision that much of the attention on s51(1) has been directed towards an attempt to isolate words which capture the spirit of the limitation. Thus it has been said that only those expenditures which are 'incidental and relevant' to the gaining or producing of assessable income are allowable as a deduction: W Neville & Co v Federal Commissioner of Taxation [1937] HCA 9; (1937) 56 CLR 290 at 305; Ronpibon, supra, at 56. [It is perhaps pertinent to note that the word 'incidental' is capable of bearing differing and, indeed, opposing meanings, and therefore it is important to emphasise that the correct meaning of the word in this context is that which is 'naturally appertaining or attaching' or apt to occur, and not that which is 'casual', 'fortuitous' or non-essential: The Oxford English Dictionary, Oxford University Press, 1978, Vol V, pp 152-3.]

(g) The shortcomings of this phrase, but at the same time its importance, was noted in the judgment of Williams, Kitto and Taylor JJ in Lunney, supra (at 497):

... the expression "incidental and relevant" was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section.

No doubt both of the propositions involved in this contention [ie. that the expenditure was both 'incidental' and 'relevant'] may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income".

(h) The true sense of the phrase, however, is explained by Gibbs CJ, Stephen, Mason and Wilson JJ in Federal Commissioner of Taxation v Smith [1981] HCA 10; (1981) 147 CLR 578 (reiterating comments made in Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344 at 351), where their Honours said: (at 586)

What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoings resulting in the generation of income but to its nature and character, and generally to its connection with the operations which more directly gain or produce the assessable income. [Emphasis added]

This last passage contains two crucial points. Firstly, it emphasises that merely because an outgoing in a causal sense results in or leads to assessable income does not make it deductible. It is only those expenses which are incidental and relevant to the operations which more directly gain or produce the assessable income which will be deductible. Secondly, it demonstrates that the technique which is to be used in ascertaining whether the requisite relationship exists is to focus on the nature or character of the expense, or in the words of Williams, Kitto and Taylor JJ in Lunney, the "essential character of the expenditure" (at 497); and determine where the expense lies in the context of the activities directly out of which assessable income is produced. This then requires a clear understanding of what, from the broad canvass of everything which the taxpayer does in order to earn his or her income, are those operations or activities which more directly produce assessable income. As Hill J in Federal Commissioner of Taxation v Cooper [1991] FCA 164; (1991) 21 ATR 1616, 91 ATC 4396 said: (at ATR 1634, ATC 4412)

It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income, and to determine whether the outgoings (or where relevant the losses) are incidental and relevant to those operations or activities.

In the same vein, Waddel J in Federal Commissioner v Vogt 75 ATC 4073 said: (at 4078)

... the first step in determining whether the expenditure in the present case is deductible under sec. 51(1) is to state what are the relevant aspects of the operations carried on by the taxpayer for the production of his income ... This step must first be taken in order to take the next step which is to determine what was the essential character of the expenditure itself.

(i) The essential character 'test' or technique is also used in order to determine whether an outgoing is a private expense and thus excluded from deductibility: Federal Commissioner of Taxation v Cooper, supra, at ATR 1620, 1637; ATC at 4414. Despite doubt as to the exact meaning of the exclusion, in the context of considerations which lead to the conclusion that an expense is "incurred in gaining or producing" assessable income, and notwithstanding the empirical finding of Professor Parsons (recorded in 1985 but which, as far as the Tribunal is aware, still holds true), namely that "there is no case in which an expense has been found to be incurred in gaining assessable income, but has been denied deduction as a private or domestic expense" (R Parsons, Income Tax in Australia, Law Book Company, 1985 p 452), the currently accepted view is that there is no "necessary antipathy between a loss or outgoing incurred in gaining or producing assessable income and a loss or outgoing of a private nature": John v Federal Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417 at 431.

(j) A consequence of the autonomy of the exclusionary limb is that the analytical division implied by the subsection must be adhered to. As Hill J said in Federal Commissioner of Taxation v Cooper, supra: (at ATR 1633-4, ATC at 4411)

Thus, it is necessary to first consider, in respect of any loss or outgoing, whether it falls within one or other of the inclusory limbs, and if it does, to then proceed to consider whether the loss or outgoing is of a private nature.

However "[t]here is, of course, considerable overlap" between the considerations relevant to the former and the latter questions: per Hill J in Federal Commissioner of Taxation v Cooper, supra, at ATR 1637, ATC 4415.

(a) Any legal understanding of the character of travel expenses must begin with the case of Lunney, supra.

(b) That case concerned two taxpayers who each claimed as deductible the expenses of travelling from their homes to their respective places of work. Kenneth Lunney was a ship's joiner who travelled from his home at Narraweena to his place of employment at Darling Harbour; Nigel Hayley was a dentist who owned his own practice, and who travelled from his home in Strathfield to his surgery at Macquarie Street in Sydney City. By majority (Dixon CJ, Williams, Kitto, Taylor JJ; McTiernan J dissenting) the High Court ruled that the expenses incurred by each of the appellants in travelling between home and work were not deductible. The finding of the Court thus embraced the travelling expenses of both employees and the self-employed, and made no distinction between them.

(c) Of the majority, Dixon CJ decided the case on precedent, holding that the result followed from "old authority long accepted and always acted upon" (100 CLR at 486), although voicing concern at its ultimate rationality, whereas Williams, Kitto and Taylor JJ in a joint judgment decided the case primarily on principle, evidencing no such diffidence. Justices Williams, Kitto and Taylor addressed the argument of the appellants, that their travelling expenses were incidental and relevant to the derivation of assessable income, in the following passage: (at 498)

The question whether the fares which were paid by the appellants are deductible under s. 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It is, of course, beyond question that unless an employee attends his place of employment he will not derive assessable income, and in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.

Their Honours did not doubt that the expenses were 'productive' of assessable income in a causal sense ("[n]o doubt both of the propositions involved in this contention may, in a limited sense, be conceded..."); this was not, however, held to be sufficient for the purposes of deductibility. The most that could be said of the travelling of the taxpayers in the case is that it placed them in a position to do the activities which earned their assessable income; and this, their Honours found, did not satisfy the requisite proximity to the actual derivation of income to qualify the expense of such travelling as deductible. Their Honours therefore rejected "the notion that expenditure incurred by a taxpayer in order to travel from his home to his place of business is, in any sense, a business expenditure or an expenditure incurred in, or in the course of, earning assessable income" (at 501).

(d) The above reasoning resulted in the finding that the expenses were not deductible because they did not fall within the positive limbs of the section. Their Honours also "go further", finding that the expenses were properly characterised as private expenses, and thus also expressly excluded by the negativing aspects of the section (at 501). This, it was stated, was due to the fact that "the purpose of such journeys is, at least, as much to enable him to reside at his home as to attend his place of work or business" (at 499) and "at the most ... a necessary consequence of living in one place and working in another" (at 501). The outgoings were of a private nature because they were referable not to the employment or business of the taxpayers, but to a personal decision as to where to live.

(e) It is to be noted that the reasoning of the joint judgment in Lunney corresponded with the two step analytical division which the section requires. It was found that the expenses there under consideration were, firstly, not incurred in gaining of assessable income, and secondly, of a private nature.

(f) Their Honours did NOT rule, however, and this can be seen from their reasoning concerning both the positive limbs and the negative limbs, that all expenses incurred in travelling are of necessity incapable of deductibility.

(g) In relation to the positive limbs of the section, the joint judgment in Lunney makes it clear that there may be occasions where expenses incurred in travel fall within the words "incurred in gaining or producing the assessable income". The extract is worth repeating: (100 CLR at 499)

Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived. [Emphasis added]

Thus travel expenses may be "incurred in gaining or producing" assessable income; but, as their Honours emphasise, not for the bare reason that such expenses enable income to be derived.

(h) In relation to the negative limb, and more specifically the principle that journeys which are a result of a personal decision of the taxpayer to live away from work are of a private character, Lunney is not regarded as having ruled that the expense of every journey from a taxpayer's residence is of necessity a private expense. This interpretation of Lunney derives from recognition of the fact that the case of Federal Commissioner of Taxation v Green [1950] HCA 20; (1950) 81 CLR 313 (hereafter Green) was cited before their Honours and not disapproved. The argument is put succinctly by Mr Beddoe in Case W4 89 ATC 133 at 139:

It is significant that their Honours did not mention Green's case although it was cited to them (100 CLR 483) and extensively referred to by McTiernan J. in his dissenting judgment. Their Honour's reasons must therefore be read in the context that Green's case was not seen as a decision to the contrary but rather a decision on different and distinguishable facts.

To the extent that Green allowed as a deduction the expense of a taxpayer's travel from his home to his income-producing properties the conclusion must follow that their Honours in Lunney did not regard every expense incurred in travel from a residence as a private expense. Although it will be necessary to return to the case of Green at a later point in these Reasons, it is sufficient at this point to say that the support of the finding in Green which is implicit in the judgment of the majority in Lunney makes it clear that their Honours in the latter case did not rule that travel from a place of residence is, of necessity, private in nature.

The point was brought home by Rath J in Federal Commissioner of Taxation v Collings 76 ATC 4254 (hereafter Collings), where his Honour said: (at 4267):

It seems to me that, under sec. 51(1), where the question is whether travelling expenses between home and work are deductible, and the case is not the simple one of the regular daily journey, it is necessary to pose the question inherent in the words of the provision without the preconceived limitation that the element of choice in the place of the taxpayer's residence necessarily requires the answer that no deduction is to be made. [Emphasis added]

(i) Thus it can be seen that, although the majority of the High Court ruled out the deductibility of expenses with respect to the 'simple daily journey' from home to work, it did not hold that all expenses incurred in travel, even from a residence, are necessarily non-deductible in all cases. This having been said, it is at the same time, however, a mistake to look upon Lunney too narrowly, namely, as a precedent ONLY with regard to the 'simple daily journey' from home to work. For it must be stressed that Lunney is above all else the source of the invalidity of a particular type of reasoning, namely, that an expense is incurred in gaining assessable income simply because it is a prerequisite to the earning of such income. In this respect Lunney is applicable to all cases.

Perception of the permissibility found in the joint judgment has resulted in considerable development of the law in relation to the deductibility of travel expenses since Lunney, to which I now turn.

(j) There have emerged since Lunney examples of situations where travel expenses have been allowed as deductions, notwithstanding that they were incurred in travelling between a place of residence and a place of work.

(k) These situations were summarised in the judgment of Northrop J in Federal Commissioner of Taxation v Genys (1987) 17 FCR 495 at 498.

However, the general proposition laid down in Lunney (supra), notwithstanding that it remains good law, is not exhaustive. In Garrett v Federal Commissioner of Taxation (1982) 58 FLR 101; 82 ATC 4060, the Supreme Court of New South Wales constituted by Lusher J, held that it had no application to the following situations:

(a) where the taxpayer keeps necessary equipment or instruments at his home which he needs for the purpose of performing his work, and by reason of its bulk, such equipment needs to be transported by vehicle from the home to his place or places of work and where the equipment is used at home;

(b) where the taxpayer incurs expenses for travel between two places of business or work; and

(c) where the employment can be construed as having commenced at the time of leaving home.

A fourth situation, not enunciated in Garrett (supra), is where the taxpayer travels between home and shifting places of work, that is, an itinerant occupation.

(l) A number of observations are relevant in relation to the situations referred to in the quoted passage in subclause (k). The first is that they are not in conflict with what was decided in Lunney. In this respect these situations are probably better regarded as applications of, rather than 'exceptions' to, Lunney. This is because, as said above, Lunney is not to be regarded as prohibiting the deductibility of all travelling expenses, but only those which are claimed by virtue of a particular line of reasoning. Moreover, the leading cases which have established these situations have done so, at least ostensibly, within the bounds of Lunney, or in other words, without employing the reasoning explained therein as invalid: see Federal Commissioner of Taxation v Vogt 75 ATC 4073 with respect to situation (a); Green, supra, Collings, supra, Owen v Pook (1970) AC 244 and Taylor v Provan [1975] AC 194 with respect to situations (b) and (c); and Federal Commissioner of Taxation v Wiener 76 ATC 4006, Horton v Young [1972] Ch 157, and Taylor v Provan [1975] AC 194 in relation to the fourth situation.

(m) The second observation is that deductibility in situation (c) follows only upon the finding that the home is the 'base of operations' of the taxpayer (see Genys, supra, at 499-501; as well as Collings, supra, at 4268; Case 43/94 94 ATC 387 at 392; Case 7/94 94 ATC 140 at 145; Case W4 89 ATC 133 at 142; and Case L49 79 ATC 339), from which he or she travels to his or her other place(s) of work. The travel is considered deductible because the "journey from home to the office is undertaken, not to commence duty, but to complete an aspect of the employment already under way before the journey commences" (per Rath J in Collings, supra, at 4262). It is to be noticed that situation (c) thus necessarily entails the requirement for a relationship or connection between the activities or work carried out at the home and the work carried out at the destination of the travel.

(n) The third observation is that situation (c), therefore, is in reality only a variation on the theme found in situation (b), namely that the expenses incurred in travel between two or more places of work or business are allowable deductions. What is not clear, however, at least from the above passage in Glenys, is whether in situation (b) the same requirement exists (as in situation (c)) for a relationship or connection between the work carried out at both places. It is this question which is at the crux of the present matter, and which now requires resolution.

1. THE PRESENT QUESTION STATED AND RESTATED
   • (a) The Applicant in the present case, it is not disputed, has two places of income derivation. They are, however, entirely unrelated to each other. Moreover, the Applicant resides at one of those places. The question here, therefore, is: are the expenses incurred in travel between two places of unrelated income production, where one of those places is also the home of the taxpayer, allowable as deductions under s51(1)?
   • (b) It is perhaps apt to mention at this point that the distinction often drawn between expenses incurred whilst 'on work' (which have the required character of deductibility) as opposed to those incurred going 'to and from work' (which do not) is of no assistance in this case if applied superficially. For a simple assertion of that principle, felicitous as it may be, merely begs the question. This is because the force of the Applicant's submission is that travel to and from two places of work, even when the activities at each place are unrelated to each other, is itself to be characterised as travel 'on work'.
   • (c) The essential question to be resolved in this case is therefore whether travel between two unrelated places of income production, where one of those places is also the home of the taxpayer, can be characterised as travel 'on work'; or put another way, whether the expenses are sufficiently connected with, or incidental and relevant to "the operations which more directly gain or produce" assessable income; or ultimately in the words of the subsection, whether the expenses of such travel are incurred "in (the course of) gaining or producing the assessable income".
   • (d) Following the analytical division required by the subsection, this question resolves itself into two subsidiary questions: Firstly, is the travel between two places of unrelated income derivation "incurred in gaining or producing" assessable income? And secondly, if the answer to the above is in the affirmative, what, if any, bearing does the existence of the taxpayer's residence at one of those places have on the matter?

1. EXPENSES INCURRED IN TRAVELLING BETWEEN TWO UNRELATED PLACES OF WORK OR BUSINESS: ARE THEY "INCURRED IN GAINING OR PRODUCING" ASSESSABLE INCOME?
   • (a) The first case to consider in this respect is that of Green, supra. In that case the taxpayer derived income from a variety of sources, including rent from a number of properties in Cairns and Townsville. He managed all his own affairs, including those associated with the properties, and had for that purpose at his home in Brisbane a "properly equipped office" (81 CLR at 316; see also per McTiernan J in Lunney, supra, at 488). Each year the taxpayer would travel from Brisbane to Cairns and Townsville for the purpose of inspecting, supervising and generally looking after the properties; and he claimed a proportion of the expenses incurred in travelling thus to do. The High Court, constituted by Latham CJ, McTiernan, Webb, Fullagar and Kitto JJ, with Latham CJ delivering the judgment for the Court, allowed the taxpayer the deduction claimed. After noting the finding by the primary Judge that it was "reasonably necessary to inspect and supervise from time to time the properties from which rents were derived", the Court concluded: "The expenditure, a deduction of which is claimed, was incurred in relation to the management of the income-producing enterprises of the taxpayer" (at 319).
   • (b) This case is often put forward as authority for the proposition that travelling expenses between two places of work, even though the employment or business at each place may be unrelated, are deductible (see eg. E Wallace, "The Deductibility of Travelling Expenses", (1972) 1 Australian Tax Review 87 at 87, 92, 94). The Tribunal, however, does not agree that this conclusion is supported by the decision. The reasoning of the High Court in permitting the deduction was that the expenditure was incurred in the management of the properties, and that management had its base at a fully equipped office from which the travel commenced. It appears from the report that Mr Green in that case had the centre of his diverse business operations at a single office, but the fact that he carried on more than one income earning activity from the one office should not cloud the fact that it was travel from that office, his base of operations for his rent producing concern, to the actual rental properties themselves in Townsville and Cairns which was allowed as a deduction. The Court thus permitted a deduction for expenses incurred in travelling not between two unrelated places of business but between two related places of business. It is the view of the Tribunal, therefore, that this case cannot stand for the more general proposition that the expenses of travel between any two places of business are deductible.
   • (c) It is also to be noted that the Court, in reaching its decision, did not utilise the reasoning which was later rejected in Lunney. In finding that it was "reasonably necessary to inspect and supervise" the properties, their Honours were not claiming that the travel was merely an essential or necessary prerequisite to the earning of income. Rather, the necessity to actually go to the places in question was treated as a part of the very operation by which income was earned. In other words: the activity, namely the letting of property, had its base in Brisbane; the properties themselves were in North Queensland; the nature of the undertaking, it was found by the Court, required inspection and supervision of the properties in person; and therefore the travel by which such inspection occurred was itself an aspect of the income-earning process. The income earning operation, the letting of property in a distant city, by its very nature required the travel concerned. It was for this reason that the deduction was allowed, and not because of any process of bare reasoning that asserted deductibility as a consequence of a mere causal connection. It is the view of the Tribunal, therefore, that the deduction allowed in Green should not be seen as an 'exception' to the principles enunciated in Lunney.
   • (d) The case of In Re The Income Tax Acts (1903) 29 VLR 299 is also importantly examined, not specifically for its own decision, but rather for the analysis of its decision in the subsequent case of Lunney. In Re The Income Tax Acts concerned a taxpayer who carried on the business of a grazier at a property on which he also resided. The taxpayer also derived income as a director of various companies based in Melbourne, and travelled to Melbourne from his property in order to attend the meetings of the companies. A deduction was claimed for these expenses (amongst others) under s9(2) of the Income Tax Act 1865, which held that deductions were allowable for expenses which were "wholly and exclusively laid out or expended for the purpose of ... trade". The Supreme Court of Victoria granted the deduction, concluding that the travel was "necessary" and "requisite" (at 306, per A'Breckett J) for the production of the taxpayer's taxable income, in the sense that the derivation of such income was impossible without the travelling. In the words of Holroyd J (at 304):

These [director's] fees, like the profits of his [grazing] business, are part of his income, and the money which he employs in travelling up to Melbourne in order to earn them is expended for the purpose of enabling him to earn his income, and without paying those expenses, apparently, he could not earn it... in my opinion the expenses of going and returning are both necessary for the purpose of earning the money.

The decision, however, and this passage in particular, was expressly criticised by Williams, Kitto and Taylor JJ in Lunney, supra, as exemplifying the line of reasoning which their Honours regarded as incorrect in relation to the provisions of s51(1). Their Honours said, referring to the above passage: (100 CLR at 498)

Possibly, if the learned judge had been required to apply the provisions of a section similar in terms to s51 he would have found great difficulty in saying that the expenditure had been "incurred in gaining or producing" the taxpayer's assessable income.

The facts in In Re The Income Tax Acts and those of the present matter are substantially similar; this being so the inference contained in the passage from Lunney quoted directly above must be applicable. In expressing 'great difficulty' with the argument that "the expenditure" (namely, the expenses there under consideration by Holroyd J, those of travelling from one place of income derivation to an unrelated other) was "incurred in gaining or producing" assessable income, their Honours clearly indicate that the situation of travel between two places of income derivation is to be treated no differently from the situation of home to work travel as regards the invalidity of reasoning which asserts that without such travel the income (from the activities at both locations) could not be earned.

In other words, the expenses of travel between two places of income derivation are not "incurred in gaining or producing" assessable income if the most that can be said about them is that they are precursory (in the sense of a causal chain), even necessarily prerequisite, to the activities at both places which more directly earn the assessable income; in short, if they do no more than place the taxpayer in the position to earn his or her assessable income at either location.

It is important to note that the above reasoning operates as a general proposition, without reference to whether the two locations or places of income derivation are related or unrelated. Practically speaking, however, where both the place of departure and destination are referable to the self-same income earning operation (business or employment), this bare (invalid) reasoning will usually, although not always, be surpassed. This is because a division of the single income earning operation into different spatial locations (assuming this is found as a matter of fact) will ordinarily mean that the travel between the locations is itself part of the income earning operation, as it was in Green. This is explained perhaps a little more clearly in the close analogy to the reasoning by which itinerant workers are entitled to a deduction for travelling from their homes and between their numerous places of work. In relation to the itinerant worker, Brightman J said in Horton v Young [1972] Ch 157 at 163, quoted by Northrop J in Genys, supra, at 502:

It seems to me that there is a fundamental difference between a self-employed person who travels from his home to his shop ... in order to earn profits in the exercise of his trade or profession and a self-employed person who travels from his home to a number of different locations for the purely temporary purpose at each such place of there completing a job of work, at the conclusion of which he attends a different location. I do not think that it matters in the latter type of case whether the taxpayer does or does not effectively carry on any trade or professional activities in his own home. The point is that his trade or profession is by its very nature itinerant. [Emphasis added]

In a similar vein, where a single occupation is to be carried out in two distinct places (assuming this is found as a matter of fact), it can be readily inferred that the occupation by its very nature requires travel. It is in this sense that the phrase 'the travel is itself part of the income earning operation' is meant. This point, as well as its close relationship to the situation of the itinerant worker, is most clearly expressed in the judgment of Lord Wilberforce in Taylor v Provan [1975] AC 194 where his Lordship explained: (at 215)

It is only if the job requires a man to travel that his expenses of that travel can be deducted, i.e. if he is travelling on his work as distinct from travelling to his work. The most obvious category of jobs of this kind is that of itinerant jobs, such as the commercial traveller. It is as a variant upon this that the concept of two places of work has been introduced: if a man has to travel from one place of work to another place of work, he may deduct the travelling expenses of this travel, because he is travelling on his work, but not those of travelling from either place of work to his home or visa versa. But for this doctrine to apply, he must be required by the very nature of the job itself to do the work of the job in two places: the mere fact that he may choose to do part of it in a place separate from that where the job is objectively located is not enough. [Emphasis added]

It should be noted that although Lord Wilberforce was in the minority in Taylor v Provan this passage is regarded as having best stated the applicable law: Case P6 82 ATC 30 at 35. His Lordship's emphasis on 'the job' makes it clear that his reference throughout is to a single occupation or income producing activity and not to two independent occupations. The passage also makes clear that an occupation will not be regarded as divided into different spatial locations merely because some work is done here and some work there: the occupation must by its very nature involve different spatial locations.

Where there is no relationship at all, however, between the income earning activities carried out at the place of work which is the point of departure and the place of work which is the point of destination, the requirement for the expense to be "incurred in gaining or producing" assessable income will not be so readily satisfied. This is because it will be more difficult to demonstrate that the connection between the expenses of travel and the activities at each place which earn the assessable income goes beyond the fact that the former merely puts the taxpayer in a position to carry out, or enables, the latter.

(e) These, as I understand them, are the necessary conclusions that are to be drawn from the High Court cases of Lunney and Green. Before considering an application of these conclusions to the present facts and arguments, however, it is necessary to traverse the cases which were cited to the Tribunal and which have addressed fact situations similar to those present in this matter.

(f) A number of the cases which were cited before the Tribunal were decided before Lunney; thus I do not think it necessary to deal in detail with any of them other than to say that they each rely on In Re The Income Tax Acts, supra, as authority, which since Lunney is not applicable to s51(1), cite the case of Green as authorising a deduction between any two places of work (a line of argument which the Tribunal does not accept); and clearly reveal the type of reasoning which was later invalidated in Lunney: see for example, Case No. 59 (1950) 1 TBRD 218; Case No. B107 (1952) 2 TBRD 536; and also the reasoning of Mr Gibson in dissent in Case 27 12 CTBR 397 ("if the taxpayer were a director of two companies carrying on business in different states, or if he were an employee in one place and the proprietor of a business in another, it would still be prima facie necessary for him to go from one State or place to the other for the purpose of gaining or producing his assessable income": at 401, emphasis added).

(g) There have moreover been a number of cases since Lunney which apply the latter case on the basis that it relates only to the 'simple daily journey' from home to work. These cases do not, however, in the view of the Tribunal, take sufficient account of the wider impact of Lunney, namely, as authority for the invalidity of a particular line of reasoning. An example is Case B9 70 ATC 42. In that case the question was whether the taxpayer was entitled to a deduction for travel between his home, where he carried on a wrought iron business, and a factory where he was employed as a fitter. The Board found for the taxpayer, regarding Lunney as "concerned solely with the expenses of travelling from home to work, and not with a case such as the present reference involving travelling between two places of work" (at 43) and thus distinguishable on the facts. Instead, the reasoning of the pre-Lunney cases was relied upon, including Case No. 59, supra and In Re The Income Tax Acts, supra. Both Case B9 and Case B81 70 ATC 375, decided by the same Board of Review in the same year, have been subsequently disapproved; Case F43 74 ATC 245 at 248; Case N35 81 ATC 186 at 187; Case N44 81 ATC 217 at 219; and Case P6 82 ATC 30 at 37. (It should be noted, however, that Case B81 concerned the issue of travel between two branches of the same business, and thus its mode of reasoning, as opposed to its ultimate decision, conflicts with Lunney.)

(h) It is interesting to observe that the very same No. 3 Board of Review which decided Case B9 was presented with a substantially similar fact situation four years later in Case F31 74 ATC 177, but arrived at a contrary conclusion to that in Case B9, although interestingly Case B9 was cited as a precedent. In Case F31 the taxpayer worked as an accountant for a manufacturing company located in the city of Melbourne, and also carried on a private and distinct accountancy business, after hours, at his home. His own business specialised in tax agency work but also did some general accountancy and consulting. He claimed a deduction for the expenses of the following journeys: (a) between the city office and his home, which he claimed was a place of business (being a base of his private accountancy concern); (b) between his home and his parents house, to which he travelled after his evening meal in order to pick up messages left there by clients of his accountancy business; and (c) between his parents' or own home and the houses of clients. The Board of Review unanimously held that the expenses of journeys (b) and (c) were deductible but not that of journey (a). Even though his home was treated as a place of business, and the travel between his city office and his home thus travel between two places of income production, the Board refused the deduction because the dissociation of the two employments meant that the travel between them was no more than preliminary to the activities by which income was earned at each place. Thus the Chairman, Mr Dubout said: (at 180)

On the evidence in this case, it is clear that the daily travelling by the taxpayer from his place of residence to the city premises of his employer was undertaken solely to enable the taxpayer to perform his duties for the employer. No part of the expenses referable to that home-to-work travelling had the remotest connection with the carrying on by the taxpayer of his accountancy practice. It seems to me that when one looks at the reality of the situation, the home-to-work travelling expenses of this taxpayer are in no different category from those of the taxpayers concerned in the cases of Lunney v F. C. of T and Hayley v F. C. of T. (1958) 100 CLR 478. [Emphasis added]

On the other hand, the expenses of travelling between the places referable to the same income producing concern were allowed as deductions. The distinction made by the Board between travel with respect to unrelated places of income derivation on the one hand, and travel in respect of related places on the other was clearly brought out in the reasons of Mr Dempsey. He said (at 183):

Taxpayer certainly conducted a business at his place of residence. However, he did so after he had completed his normal working day in the city. I am unable to see any connection between the two activities. He used his car to travel from his home, which did serve the dual purpose of a home and an office, and his place of employment and to return to his home after completing his duties as an employee. This is clearly on all decided authority, private travelling, irrespective of the fact that on an occasion he did bring work home from his place of employment... His claim for the cost of travel to and from his home and his place of employment in my view must fail ... Coming now to the travel between his home where he did carry out for a fee accounting functions and his [parents'] residence which he used as a collecting point for messages etc. and between his home and his clients I consider that this part of the overall cost is allowable under sec. 51(1).

(i) The case is all the more interesting because its peculiar factual combination brings into sharp relief the notion of 'related' places of income production. The taxpayer was at all the places concerned (including the city office) engaged in the one professional endeavour, namely accountancy. But his 'acts of accountancy' were split between two distinct and unconnected income producing operations, one being employment as an in-house accountant, and the other, his own accountancy practice. The decision of the Board in disallowing the deduction for travel between the city office and the home business thus reveals that 'relatedness' is not a matter of the general type of activities carried on at each place (eg. accountancy) but rather a matter of relationship to a set of actions geared towards a particular income producing concern (eg. employment as an accountant as distinct from a discrete accountancy business).

(j) This case is the first case since Lunney in which it was recognised that the deductibility of expenses of travel between distinct places of income derivation will not be allowable unless more can be said of the travelling than that it enables the production of income in two places. This has, however, been a regular theme in subsequent cases, such as Case J9 77 ATC 88 (travel between place of employment as a scientist and home where taxpayer was writing for reward a book unrelated to the field of science in which employed - expenses not deductible); Case J35 77 ATC 332 (travel between income producing farm where taxpayer lived and separate place of employment - expenses not deductible); Case N35 81 ATC 186 (travel between place of full-time employment as an accountant and home where taxpayer carried on accountancy practice on his own account - expenses not deductible); Case N44 81 ATC 216 (identical to Case N35 - interestingly the Board there regretted "the fact that a firmly held belief has gained currency that travel expenses incurred between two places of income production are automatically entitled to deduction" at 217 (emphasis in original)); Case P6 82 ATC 30 (travel between income producing farm, where taxpayer resided, and place of distinct employment in a nearby city - expenses not deductible); and Case Q49 83 ATC 237 (travel from employment at dairy farm, where he also lived, and place of employment as a crane operator - expenses not deductible except where some aspect of farm work was carried out simultaneously with the journey to or from the crane employment).

(k) Of all of the above cases it is useful to consider more particularly Case P6, a case which contained facts remarkably similar to this matter. In that case the taxpayer was an employee of the Australian Tax Office, who lived on a farming property with his family. At the property various activities for the production of income were carried out by the taxpayer and his family, including the breeding of pedigree goats and the spinning of coloured wool. The taxpayer claimed a deduction of the expenses of travel between the property, being a place of business, and the place of his employment with the ATO. The No. 2 Board of Review, constituted by Messrs Brady, Voumard and Stewart, denied the deduction. The Board, addressing the positive limb of s51(1), said: (at 36)

Turning now to the present hearing, we ask ourselves: was the expense outlaid by the taxpayer incurred in the course of earning his assessable income? Our finding is that it was not. An examination of the cases where the taxpayers were successful in obtaining deduction for their travel expenses reveals that the travel was made necessary by the very nature of the employment. Because of the special nature of the taxpayer's duties, it could be said that they were travelling on their employment instead of to their employment. The outgoings were thus incurred in gaining or producing assessable income.

The Board thus makes it clear that travel between two places of income derivation is not by virtue of that fact only travel 'on work'. Only where the "travel is made necessary by the very nature of the employment" will it be regarded as travel 'on work'. It is also clear that the 'necessity' of which they speak is neither the necessity of simply getting to the place of work in order to embark on the activities which earn assessable income, nor the necessity of travel for there to even exist two separate sources of income; it refers rather to travel which is specifically required by the particular nature of either employment. The travel must be a part of the job description, as it were, of either income source. In relation to the taxpayer in that case the Board went on: (at 36)

The travel undertaken by the taxpayer in the instant case was not made necessary by the nature of his employment. When he left his property to travel to A each day he was simply travelling to work; he was not travelling in the course of his duties. Likewise when he travelled to his home of an evening, he was not travelling on work even though the probabilities were that he would work on partnership [ie. the farming] business once he arrived home. In his situation, the two income producing activities, viz. his employment at the Taxation Office and his involvement in the family partnership, were discrete; the taxpayer at no time contended that his work at his home in the evening represented a continuation of his work performed during the day. That aspect of his situation is in marked contrast to the situation which appertained in Pook v Owen_,_ Taylor v Provan and Colling's case where the activity inducing the travel was an integral part of the one employment.

Even though the taxpayer's travels were between two places of income production, such travel was not deductible because, as the two income sources were discrete, the travel could not be regarded as part of the operations of either to any extent more than the insufficient fact that it was necessary to travel in order to derive income in two places.

(l) The passage quoted directly above also refers to a point which is often overlooked in discussions of the present issue. Given the distinction which is made between travelling between places of work which are referable to one income producing operation (ie. one employment or one business) and travelling between places of discrete operations, it is not appropriate to cite as authority for the deductibility of the latter expenses, cases pertaining to the former. Thus, whereas Rath J said in Collings, supra, (at 4267), "if a man has several places of work, travelling between them constitutes travelling on his work, even if one of those places is also his place of residence"; and whereas Lord Salmon in Taylor v Provan, supra said (at 225), "[i]t is also well established that if a man has several places of work, travelling between them constitutes travelling on his work", these statements must, in the words of the Board of Review in Case P6: (at 36)

... be read within the context of the factual circumstances where [they] were made, for it is worth repeating that the terms of the employment of both Miss Collings and Mr. Taylor were special to them. Both taxpayers obtained deduction not because they were travelling between two places of work but because they were travelling on their work [in the sense used above]. Travelling between two places of work was not regarded by the respective Courts as grounds per se for deduction.

(m) Case F43 74 ATC 245 was cited by both the Applicant and the Respondent in support of their respective cases, and thus it is necessary to provide some examination of it . That case concerned a taxpayer who carried out a strawberry growing business at his residence, and who travelled during the week from his residence to a place of employment in a nearby city. The taxpayer also had another job in the same city which he travelled to on the weekends. He claimed that the costs of travel from his residence to both employments were deductible because his residence was a place of business. The No. 2 Board of Review held that the expenses were not deductible for the primary reason that they were, despite the existence of a business (or, at least, commercial activity) at the residence of the taxpayer, essentially of a private character and thus excluded by the negative limb of s51(1). For the purposes of a discussion on the positive limb of s51(1), however, the following words by the Board deserve analysis: (at 247)

Travelling between places of concurrent employment stands in an entirely different light and the cost thereof, at least in ordinary circumstances, satisfies the test of sec. 51... It is true that such an expense is not incurred in performing the duties at either place of employment for which remuneration is received. Nevertheless ... it can be seen to be incurred "in the course of gaining or producing" the sum of the income and to be "incidental and relevant" to the derivation of the total income. [Emphasis added]

(n) Mr McGovern, on behalf of the Applicant, made a submission analogous to the reasoning found in the passage quoted directly above, namely that the scope of assessable income comprehends the income from both sources and thus the expenses of travelling between them were incurred in gaining (the entirety of) the assessable income (see also Case T96 86 ATC 1158 at 1159). The Tribunal considers, however, that this argument should be rejected, as it is no more than a sophisticated version of the line of reasoning which was rejected in Lunney. That argument, in essence, does no more than assert that the 'assessable income' could not be earned in its totality without the travelling. Put in other words, the relevant income could not be earned from two sources without the travelling which occurs between those places. This is precisely the bare reasoning which Williams, Kitto and Taylor JJ in Lunney found was not sufficient for the purposes of deductibility. Indeed, this argument was raised in In Re The Income Tax Acts, s_upra_, at the passage cited in subclause (d), and directly rejected by their Honours. As has been seen, deductibility requires a closer connection between the expenses under examination and the operations which more directly produce assessable income than the mere necessity of the former for the occurrence of the latter. Moreover (and this is perhaps the reverse of the same coin), whereas the question of whether or not deductibility is allowable requires the isolation of those activities which more directly produce assessable income (Cooper, supra, at ATR 1634, ATC 4412; Vogt, supra, at 4078; Lodge, supra, at 171), it is precisely this isolation which is sought to be avoided by such an argument. The expenses incurred in some only of the total activities which are geared ultimately towards the earning of income are deductible, namely those which are sufficiently connected to, or are incidental and relevant to, the activities which more directly produce the assessable income. And, as Lunney makes clear, the mere enabling, by travel, of the carrying out of a second income earning operation does not establish the requisite connection, and thus is not a sufficient basis for deductibility.

(o) The Applicant put this 'totality' argument in more colourful words in his Witness Statement. He said: "I maintain that it is not relevant that these full time activities are unrelated skills. To quote the late ... Deng Xiaoping 'it doesn't matter if a cat is black or white, as long as it catches mice'." However, and using the same picturesque wording, the issue does not relate to a single cat which is either black or white, but rather two cats, one black and the other white, and the alternation between them - such alternation the expenses of which cannot be regarded as part of the ultimately relevant activities of either, by virtue of the fact that they are no more than precursory with respect to both.

(p) Returning to Case F43, it was the adoption of this 'totality' argument which allowed the Board, whilst accepting the dicta in Lunney regarding the private nature of home to work travel, to nonetheless agree with Mr Gibson in the pre-Lunney case of Case 27, supra, where Mr Gibson said: (at 401)

... if a taxpayer lives at a place where his presence is required from time to time for the purpose of engaging in income-producing activities, his expenses of travelling between that and any other place where his presence is required for similar purposes ... are incurred in gaining or producing his income. [Emphasis added]

In the view of the Tribunal, that conclusion can, after Lunney, no longer be accepted in cases of travel between any two places of income production.

(q) Decided not one month after Case P6, supra, was the case of Garrett v Federal Commissioner of Taxation 82 ATC 4060 (referred to as "Garrett"), upon which the Applicant principally relies. That case concerned a doctor who resided with his family at a farming and grazing property at Greenthorpe in the State of New South Wales. The agrarian business carried on at the property yielded considerable income. The taxpayer's medical practice was based at Caringbah in Sydney but was also carried out at various other medical centres around the State, and included an emergency semi-general practice at Greenthorpe itself. The taxpayer used an aircraft to transport himself and necessary vaccines between Greenthorpe and the various country practices as well as in connection with his farming activities; and claimed a deduction for the expense of such travel. The Commissioner allowed the costs of travel between the various medical centres and those which were related to the farming duties, but disallowed the expenses representing travel from Greenthorpe to the other locations of medical practice. On appeal to the Supreme Court of New South Wales, Lusher J found that the disputed expenses were properly deductible.

(r) The Applicant submits that the facts of Garrett are indistinguishable from the facts in this matter, and thus the expenses in the present case must similarly be deductible. The former proposition is, however, a submission which I cannot accept. Garrett is very much a decision on its own facts. See in this context, at 4065:

I find as a fact that the expenditure was incurred in travel between the different places on business for the purpose of gaining and producing income, further that the expenditure was "outgoings" incurred in gaining and producing his assessable income. [Emphasis added]

It is significant to note that Lusher J did not hold that the expenditure was incurred in gaining or producing assessable income because the travel was between two different places of business, a construction argued for by the Applicant, but rather because the travel was between two different places on business. There are indications in the judgement of Lusher J that the decision in that case turned not on the existence of a farming and grazing business at Greenthorpe but rather a branch of the taxpayer's medical practice at Greenthorpe. Hence his Honour, when looking at the "basic facts" identifies the following: (at 4064)

... the taxpayer resided at Greenthorpe with his family, a place where he carried on two businesses, one that of medical practice, the other that of farming and grazing. At Caringbah, Sydney, he carried on the practice of a medical practitioner...

Thus the case represents an example of travel between two places of income production which are referable to a single income producing operation, namely the carrying on of a medical practice. And this aspect (as with Green's case, supra) should not be obscured by the fact that more than one business was carried on at one place. It was not a case of travel between two places at which entirely discrete operations were carried out for the production of income.

(s) This interpretation of Garrett is, I think, strengthened by the following passage in the judgment: (at 4065)

The essential character of the expenditure was that it was a part of the operations by which he earned his income, and was essential to the performance of them, there being no other practical or reasonable way of transporting himself and his vaccines. I find the expenses concerned were allowable deductions within sec. 51(1). [Emphasis added]

The above reasoning, ultimately determinative of the conclusion in that case, brings out clearly the ordinary consequences of travel between two locations of the self-same income producing operation.

(t) Moreover, the facts in Garrett indicate that the medical activities carried out at the various locations were not separate in the manner apparent in Case F31, supra, where the taxpayer was an employed accountant at one location and self-employed at the other. Rather Dr Garrett's practice was regarded as encompassing the activities carried out at each of the places where he consulted with patients. This inference is supported by the fact that in Garrett the Respondent allowed the expenses of travel between the various medical centres themselves.

(u) The Applicant relies nonetheless on the following passage in the judgment of Lusher J in support of the submission that travel between two places of work, even though they are unrelated, are deductible: (at 4063)

On the other hand, where the travelling expenditure is incurred on journeys between different places of business or employment, the expenditure can be regarded as being a deduction within the subsection and this can be so even though one of the places of business may also be the home of the taxpayer, or the home can be so construed. (In re The Income Tax Acts (1903) 29 V.L.R. 299; Case B81_, 70 ATC 375;_ Case No. B107 (1952) 2 T.B.R.D. 536; F. C. of T. v. Green [1950] HCA 20; (1950) 81 C.L.R. 313; F. C. of T. v. Collings _76 ATC 4254 (_Rath J.); Owen v. Pook (1970) A.C. 244; Taylor v. Provan (1975) A.C. 194 at pp. 215 and 225.)

That passage does not, however, in the view of the Tribunal, resolve the question of travel between two unrelated places of income production. The issue, in the above formulation, is, with respect, ambiguous: the words "different places of business or employment" do not specify whether the reference is to different businesses, different employments or different places of the same business or employment. And to the degree that it cites cases which would resolve the ambiguity in favour of the Applicant, I have attempted to show in these Reasons how reliance on these cases represents a fundamental departure from the position clearly laid down by the High Court in Lunney.

(v) By way of summation, the following represents, in the view of the Tribunal, a correct portrayal of the interpretation given to the requirement that expenses must be incurred in gaining or producing assessable income, and its application to the question of expenses incurred in travel between two places of income production:

• (i) The relevant focus for deductibility is on the activities that more directly produce assessable income. It is only if the impugned expenses are sufficiently 'productive' of assessable income, or in other words, 'incidental and relevant' to those more direct activities, that they will be deductible.
• (ii) Expenses will not be 'productive' of assessable income, or 'incidental and relevant', in the required sense if they are, in a causal sense, no more than preliminary to or a prerequisite, even necessarily so, of the relevant activities, in other words, if they merely enable the taxpayer to earn the assessable income.
• (iii) It follows that the expenses of travel between two places are not necessarily deductible merely because the taxpayer carries out income producing activities at each place. In particular, such expenses will not be deductible if no more can be said about them than that they put the taxpayer into the position to earn income at either location, or enable the taxpayer to have two sources of income.
• (iv) A closer connection is required between the travel and each income earning operation, such as the fact that the travelling is, due to the nature of at least one of the occupations of the taxpayer, part of that very operation.
• (v) Where both the place of departure and destination are referable to the self-same business, employment or income earning operation or programme, it can be readily inferred that the travel is an aspect of the operations by which income is earned (although this is not invariably so). This is because the division of a single income earning operation into different spatial locations will ordinarily (but does not necessarily) imply that travel between the locations is a part of the operation itself. But where the point of departure and the point of destination are referable to two unrelated income earning operations the required connection will not be so readily demonstrable.

Application of the present facts to the law with respect to expenses incurred in gaining or producing assessable income

(w) I think it is apparent that an application of the above principles and conclusions operates to deny the Applicant the deductions sought.

(x) The activities by which the Applicant earns his income is the flying of planes and the farming of deer. The relevant expenses were incurred by the Applicant in travelling to the location where each of these activities were carried out. The expenses are certainly necessary for the production of income, they are even essential in the sense that the earning of income from both places is impossible without them: but these factors, as Lunney makes clear, are not sufficient for the purposes of deductibility.

Putting this in positive terms, the test of deductibility which the positive limb of s51(1) establishes is that the expense must be referable to an activity which produces, or is expected to produce, assessable income. The expense here is incurred in travel. The focus then is on the word 'produce': is the travel of the Applicant 'productive' of his assessable income? There is no doubt that in ordinary parlance, or in terms of a causal chain, the travelling is 'productive' in the sense that it ultimately leads to the production of income, because unless the Applicant travels he will not be able to earn the income which he does. But the case of Lunney makes it clear that that which is deductible, ie. that which is 'productive' for the purpose of deductibility, does not go so far back in the causal chain. Subsection 51(1), as Lunney makes clear, does not permit the deductibility of expenses which have as their sole relation to the operations which produce the assessable income the fact that the latter could not occur without the former. Given that on the facts as proved the travel of the Applicant does no more than put him in a position to earn his assessable income, in other words, does no more than enable him to carry on two income producing operations, to both farm and fly, the expense of such travel is not deductible.

(y) This conclusion must be, moreover, unaltered by the fact that the Applicant engages in activities immediately before and while departing the property and immediately upon returning to it from the airport. These activities are essentially unrelated to the expenditure which was in fact claimed as a deduction; the relevant costs were substantially incurred after (when departing the property) and before (when arriving) the performance of such duties. These activities do not, therefore, modify the character of the expenditure sought to be deducted: see Case J35, supra, at 334; Case P6, supra, at 36; and Case Q49, supra.

(z) The conclusion must be therefore that the claimed travel expenses of the Applicant were not incurred in gaining or producing assessable income.

1. EXPENSES OF A PRIVATE CHARACTER
   • (a) Having found that expenses claimed do not fall within the strictures of the limitation found in the words "incurred in gaining or producing the assessable income" it is, strictly speaking, unnecessary to deal with the further restrictions of the negative limbs of the subsection. Both the Applicant and Respondent, however, dealt at length with the issue and I think it is appropriate to address it briefly.
   • (b) If the expenses of the Applicant were incurred in gaining or producing assessable income, what impact would the fact that the Applicant's residence is located at one place of income production have on the matter?
   • (c) It is perhaps useful to take a hypothetical example of this situation: for example, the possibly unlikely scenario of a primary producer, who lives and works on the income producing property, but also has an office in a nearby town from which the sales of the produce of the property are arranged. Travelling from the property to the office would, on the above analysis, prima facie be incurred in gaining or producing assessable income. The question now would be: are the expenses 'private expenses', by virtue of the residence of the taxpayer at the point of departure, and thus excluded from deductibility? Briefly, the issue would be, I think, reduced to one of fact: is the taxpayer leaving his or her home or is the taxpayer leaving his or her place of business? One way of determining this question would be to focus on the substantial activities carried out immediately before departure and immediately upon arrival at the destination. The word 'substantial' is used because some momentary activities carried out on the instant before setting out would not, I think, alter the nature of the journey. For example, in the above hypothetical case, if the taxpayer was engaged with income producing activities at the property before leaving for the town office, the expense would, I think, be deductible, even if he or she made a cup of tea in the kitchen of the residence or went to retrieve an extra layer of clothing from the bedroom before setting out. By the same token, if the taxpayer was not engaged in income producing activities at the property (for example, sleeping) and then set off for the town office, the expense of the travel would, I think, not be deductible, even if he or she, moments before leaving, dispatched a quick fax relating to the produce sales. Such an analysis is perhaps suggested by Case W99 89 ATC.

2. PENALTIES
   • (a) Having concluded that the Applicant is not entitled to the claimed deduction, the question arises as to whether penalty tax is, in the circumstances, appropriate.
   • (b) It is to be noted that the relevant years span two penalty tax regimes. Thus the issue of penalty tax for the years ended 30 June 1991 and 1992 is to be decided under the former s223(1) of the Act and with regard to Taxation Rulings IT 2517 (for 1991) and TR 92/10 (for 1992); and for the years ended 30 June 1993 and 1994, under s226G and Taxation Ruling TR 94/4.
   • (c) The Respondent's argument, however, was identical in respect of both regimes, namely that the Applicant failed to take reasonable care in returning his income. The Respondent points towards the existence of various rulings, such as Taxation Ruling IT 2199 and Miscellaneous Tax Ruling MT 2027 (the 'Rulings') in support of this position, claiming that the law was made manifestly clear in each of these instruments, and that had the Applicant consulted these rulings and correctly read them he would not have returned his income as he did, or at least, that there would have been sufficient doubt as to whether he could claim the deduction such as to necessitate further inquiries. I am not, however, persuaded by these arguments.
   • (d) The Rulings are far from clear in their treatment of the fact situation which concerned the Applicant, namely that of travel between a place of business and an unrelated place of full-time employment. Taxation Ruling IT 2199 (the conclusions of which are adopted in a number of subsequent rulings, including MT 2027 and relevantly Taxation Ruling TR 95/19) makes a distinction (which, I might add, I am not convinced is altogether helpful) between, on the one hand, the situation of travel between a business or place of full-time employment and a home based part-time employment; and on the other, travel between a place of business or full-time employment and a home based full-time employment. It treats the expenses of the former situation as non-deductible, but does not deal at all with the latter situation. In fact the tenor of the Ruling gives rise to the inference that travel between "two places of employment or business" (see paragraph 4 and 9) when found as a fact, will automatically be deductible, an interpretation with which I do not agree.
   • (e) The Applicant testified, and I accept, that when completing the returns for the relevant years he had regard to the terms of the Rulings, and considered his situation as being in compliance with what was there written. Thus it was not through a failure to take reasonable care that the Applicant made the relevant claims, but rather as a result of a genuine misinterpretation of the Rulings which were themselves in some important respects ambiguous.
   • (f) Finally, and in relation to the 1993 and 1994 years, it is arguable that the Rulings, being rulings issued prior to 1 July 1992, are not 'Public Rulings' for the purposes of the penalty provisions, and that therefore a failure to adhere to them does not immediately attract a penalty (cf. Taxation Ruling TR 92/1 at paragraph 27). It is unnecessary, however, to decide the issue, given that I have found that the Applicant did take reasonable care in the preparation of his return.
   • (g) I note that Taxation Determination TD 96/42, which to a considerable extent clarifies the questions raised in this matter, was issued after the relevant years, and was not relied upon by Mr Roope as having any bearing on the penalty issue.
   • (h) In summary, I consider it appropriate that the whole of the penalties be remitted to the Respondent.

11. Accordingly, for these reasons, excepting only that all penalties are remitted, the decision under review is affirmed.

I certify that this and the 41 preceding pages are a true copy of the decision and reasons for decision herein of