Commissioner of Taxation (Cth) v Forsyth

High Court of Australia|1981-04-01|Before: Wilson JJ, Stephen J, Murphy J, Fisher JJ, Mason J, Wilson J, Aickin J

High Court of Australia Stephen, Mason, Murphy, Aickin and Wilson JJ. Commissioner of Taxation (Cth) v Forsyth [1981] HCA 15

ORDER Appeals allowed. Order of the Full Court of the Federal Court (other than that part of the order which relates to the payment of costs) set aside and in lieu thereof order that the appeals to that Court be allowed and that the original assessments be confirmed. Order that the appellant pay the respondent's costs of the appeals.

I have, in the case of Handley v. Federal Commissioner of Taxation [1] , expressed my views upon the question of s. 51 (1) of the Income Tax Assessment Act and its application to socalled home office expenses. These appeals also relate to such expenses but in this instance they consisted of weekly payments in the nature of licence fees payable in respect of the taxpayer's use for professional purposes of a study and associated facilities. No question of apportionment arises.

The study and associated facilities formed an integral part of the house which the taxpayer and his wife and family occupied as their home. The taxpayer and his wife, as the trustees of a family trust, were the owners of the house and as such granted the licence to the taxpayer.

The Commissioner conceded that the licence arrangement was genuine and effective and that the area so licensed was used by the taxpayer entirely for his professional purposes as a barrister although forming a part of his home.

The Commissioner denied to the taxpayer the deduction of such licence fees but by a majority they were allowed on a reference to a Board of Review. The Commissioner's appeals to the Supreme Court of Victoria (Murphy J.) and thence to the Federal Court of Australia (Bowen C.J., Deane and Fisher JJ.) were unsuccessful; hence the present appeals to this Court.

My conclusion in Handley necessarily leads me to dismiss the present appeals by the Commissioner. This is if anything an a fortiori case to that of Handley , it certainly presents a simpler factual position and is devoid of questions of apportionment. I am in agreement with the joint judgment of the Federal Court and would for the reasons there stated and for the further reasons stated by me in Handley dismiss these appeals.

Again I am in general agreement with what Wilson J. has written in this case. My agreement with his judgment is to be read in the light of my reasons for judgment in Handley v. Federal Commissioner of Taxation [1a] .

There are some differences between this case and Handley v. Federal Commissioner of Taxation. Here the outgoing sought to be deducted is a fee paid for the licence to use the study in the family home. The right which the taxpayer acquires under the licence is a right to occupy the study and use it for professional purposes. The outgoing is incurred in consideration of the acquisition of that right. It is not an outgoing incurred in connexion with the acquisition of the home which happens to include the study.

Nevertheless, it seems to me that the different factors present in this case do not enable us to distinguish the two cases in point of principle or to conclude that the present case falls outside the exception in s. 51 (1). The artificial arrangements, apparently brought into existence for reasons of taxation and owing little, if anything, to commercial reality, do no more than legally secure to the taxpayer the use and enjoyment of a room as a study in the family home (jointly with his wife as trustees of a family trust) which he would have in any event.

The appeals should be allowed for the reasons in Handley's Case [1b] . The fact that the payments were made by the taxpayer barrister to his family trust (of which he and his wife were the trustees) as "rent" for use of part of his family home as a study does not negate the domestic nature of the expenditure. Rather it adds colour to and emphasizes the domestic nature of the outgoings.

In the present case, the amount of "rent" (or licence fee) was not high. In Ronpibon Tin N.L. v. Federal Commissioner of Taxation [2] this Court stated "It is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent". If that statement were applicable in circumstances such as these, and if the outgoings were allowable under s. 51 (1) of the Income Tax Assessment Act 1936, there would be potential for abuse in other cases.

I have had the advantage of reading the reasons for judgment prepared by my brother Stephen. I agree with his reasons and his conclusion that the Commissioner's appeals should be dismissed.

I do not need to add to the additional observations which I made in Handley's Case.

The appellant ("the Commissioner") appeals by special leave from the unanimous decision of the Federal Court (Bowen C.J., Deane and Fisher JJ.) confirming that the taxpayer is entitled to a deduction pursuant to the Income Tax Assessment Act 1936 ("the Act") in the ascertainment of his taxable income in each of the years ended 30 June 1974 and 30 June 1975, in respect of sums paid by way of "rent" for the right to occupy a study and use other facilities in the premises used as a residence by him and his family. The decision of the Federal Court affirmed the decision of the Supreme Court of Victoria (Murphy J.) which in turn had upheld a majority decision of the Taxation Board of Review.

The respondent is a barrister, with chambers in the city of Melbourne. At all material times, his practice was such that he had occasion to work at home frequently in the evenings on week-days, and less frequently at week-ends. In 1973 he and his wife in their capacity as trustees of a family trust purchased a house in East Melbourne with the primary object of providing themselves with a home. The purchase was completed on 3 September 1973, and they took up residence on that day. Shortly prior to that day the trustees had held a meeting at which they resolved, inter alia:

It was agreed that the Trustees would permit N. H. M. Forsyth to occupy one room in the said premises as a study, together with such ancillary space and facilities as he might reasonably require from time to time for the purposes of his professional practice as a barrister; and that he would pay therefor the sum of $20 per week or such other sum as might be mutually agreed upon from time to time.

It was agreed that the Trustees would permit N. H. M. Forsyth to occupy the remainder of the premises as a residence upon the terms that so long as he was the occupier of the property: (a) he paid all outgoings, and kept the premises in proper repair; (b) he paid the interest under the said mortgage; and (c) he made no demand for the moneys advanced by him to the Trustees.

The house is a nineteenth century terrace house occupying the full width (26 ft 6 in.) of the land. Downstairs the entrance leads into a living room running the full width of the house with a stairway and bar. The dining room and kitchen are located side by side behind the living room, with further facilities in a short narrow wing to the rear. To one side of the living room, at the foot of the stairs, is a space where the taxpayer placed a desk at which he often works. This represents the "ancillary space and facilities" to which the resolution of the trustees refers.

The stairway leads up into the middle of the upstairs area where there is a lobby with two rooms to the front and two rooms to the rear. The rooms are large (each 16 ft × 13 ft approximately) and there are two bathrooms. One of the rooms is equipped and furnished as a study. It is adjacent to the master bedroom, and includes a cupboard where the taxpayer keeps his clothes. He uses the room as a dressing room.

It is common ground between the parties - (a) that the primary use of the study was for professional purposes in relation to the taxpayer's practice as a barrister; (b) that the agreement between the taxpayer in his personal capacity and the trustees was bona fide; (c) that in each of the tax years in question the taxpayer paid a total sum of $840 and $1040 respectively in consideration of the permission given to him to occupy the study together with such ancillary space and facilities as he might reasonably require for the purposes of his professional practice as a barrister; and (d) that in the circumstances there was nothing unreasonable about the quantum of such consideration.

The question involved in these appeals is whether pursuant to s. 51 of the Act, the taxpayer is entitled to a deduction of the amounts of $840 and $1040 respectively in ascertaining the taxable income of the tax years in which they were paid. I may say in passing that I agree with the Federal Court that to describe these payments as "rent" would appear to be inaccurate, and that under the arrangement the taxpayer is more appropriately described as a licensee, with the consideration having the character of licence fees rather than rent.

Section 51, so far as relevant, provides as follows:

(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income

Having regard to the definition of business in s. 6 of the Act, which includes a profession, the taxpayer may rely on either or both of the two criteria of deductibility which are described in positive terms in this provision. The second alternative probably prescribes a test which is different, if not wider, than the first, but I do not think that in the circumstances of this case any distinction is material. This Court in Ronpibon Tin N.L. v. Federal Commissioner of Taxation [3] observed that the words "incurred in gaining or producing the assessable income" mean "in the course of gaining or producing such income", and that they have a very wide operation and will cover almost all the ground occupied by the alternative phrase.

The proper construction of s. 51 has been discussed by this Court in a number of cases, and I think it is fair to say that its application in the circumstances of each case remains very much a matter of fact and degree.

Mr. Sheller, for the Commissioner, argues that in order to determine deductibility one must look to the essential character of the expenditure in order to determine its relevance to the gaining or producing of assessable income. He draws support for this test from the joint judgment of Williams, Kitto and Taylor JJ. in Lunney v. Federal Commissioner of Taxation [4] . Their Honours, after referring to earlier expositions of the scope of s. 51 of the Act in the cases of Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [5] ; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation [6] ; Ronpibon Tin; and Charles Moore and Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation [7] , say [8] :

In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself. 1. (1958) 100 C.L.R. 478. 2. (1935) 54 C.L.R. 295. 3. (1937) 56 C.L.R. 290. 4. (1956) 95 C.L.R. 344. 5. (1958) 100 C.L.R., at p. 497.

In the Federal Commissioner of Taxation v. Faichney [9] Mason J. had occasion to consider a case which in some respects was similar to the present case. The taxpayer was a scientist employed by the C.S.I.R.O. who spent an appreciable amount of time at home working on matters that related directly to the actual work on which he was engaged in his employment. He claimed a deduction in respect, inter alia, of a proportion of the mortgage interest referable to his home office. His Honour rejected the claim on the basis that it was an outgoing of a capital, private or domestic nature, saying [10] :

To my mind, a study in a taxpayer's home, no matter how great the extent of its dedication in point of use to the pursuit of those activities from which the taxpayer earns his income, is a part of that home. Expenditure incurred in the erection of the study or in its renovation is as much an outgoing of a capital, private or domestic nature as expenditure on any other part of the home. 1. (1972) 129 C.L.R. 38. 2. (1972) 129 C.L.R., at p. 43.

Mason J. referred to the decision of Walsh J. in Thomas v. Federal Commissioner of Taxation [11] , where the taxpayer, who was a barrister, sought a deduction in respect of part of the interest payable under a loan which had been raised and expended partly for the purpose of adding to his house a study which was devoted to use for professional purposes. The claim was rejected. Walsh J. said [12] :

But, in my opinion, the house should not be regarded in the circumstances of this case as being or as including part of the business premises of the appellant and the loan should not be regarded as having been raised for the purpose of providing him with business premises. Payment of the interest was an outgoing "of a capital, private or domestic nature" within the meaning of s. 51 (1) of the Act. In my opinion it did not lose that character merely because the appellant, like most professional men, did some of his work at home, or because he used one of the added rooms for that purpose. The appellant did not spend money in erecting premises suitable only for use as business premises. He added rooms to his house. 1. (1972) 46 A.L.J.R. 397. 2. (1972) 46 A.L.J.R., at p. 399.

The decisions in Thomas and Faichney led Helsham J. in Federal Commissioner of Taxation v. McCloy [13] to hold that mortgage interest and insurance referable to a home office did not bear the essential character of an outgoing incurred in gaining or producing the assessable income of the taxpayer.

[1975] 1 N.S.W.L.R. 202; 5 A.L.R. 330; 5 A.T.R. 315; 75 A.T.C. 4079.

In the light of these cases, Mr. Sheller argues that the essential character of the rent payable by the taxpayer is not properly described as an outgoing incurred in gaining assessable income or necessarily incurred in carrying on a business for the purpose of gaining such income. The study and facilities in his residence did not constitute business premises. They did not represent, with reference to the earning of income, his base of operations. In doctrinal terms, the outgoing was neither incidental nor relevant to the gaining of assessable income.

On the other hand, Mr. Shaw, for the taxpayer, relies on the terms of the agreement with the trustees, by which the rent was paid in consideration of a licence to occupy premises "for the purposes of his professional practice as a barrister". It is common ground that the room and facilities were used for these purposes.

In Commissioner of Inland Revenue v. Banks [14] the taxpayer was an accountant who was also employed as a part time lecturer at a Polytechnic. The Polytechnic did not supply him with a study or any facilities, and the dining room in his home was the only place where he could prepare lectures and mark papers. He claimed a proportion of mortgage interest and other outgoings related to the home. The provisions of ss. 111 and 112 of the Land and Income Tax Act 1954 (now repealed), although different in form, are indistinguishable in effect from s. 51 (1) of the Act. The Court of Appeal upheld the claim, declining to follow the Australian decisions of Thomas [15] , Faichney [16] and McCloy [16a] , and approving an earlier decision in New Zealand of Beattie J. in Inland Revenue Commissioner (N.Z.) v. Castle [17] . The emphasis in the New Zealand approach is upon the "use" of the premises or part thereof, as may be seen in the following passage from the Court of Appeal's judgment in Banks [18] :

In the case of premises serving as a family home there are many instances where a workshop, surgery or study, or other part of the premises, is physically set up for income earning activities. That may be cogent evidence of an intention to use that part of the premises for income related purposes and may support the contention that to that extent the premises have that character. But physical change is not always necessary to allow the use of premises in the income earning process. We see no distinction in principle between two cases; one, where a room is formally set aside for income purposes and the other, where it is simply used for income related activities. Nor is it essential that its primary use be for income earning purposes. There is no such qualification in the statute. Indeed, the expressions "to the extent" and "so far as" demonstrate the absence of a statutory minimum applicable in all cases.

As we see it, the essential question for consideration is whether part of the premises - whether set up as a workshop or surgery or study, or whether simply used for income related activities - has a sufficient connection with the taxpayer's income earning process to justify the conclusion that expenditure referable to that part of the premises is incurred in the course of gaining or producing the assessable income. [19] .

[1978] 2 N.Z.L.R., at p. 482.
1. [1978] 2 N.Z.L.R. 472.
2. (1972) 46 A.L.J.R. 397.
3. (1972) 129 C.L.R. 38.
4. [1975] 1 N.S.W.L.R. 202; 5 A.L.R. 330; 5 A.T.R. 315; 75 A.T.C. 4079.
5. [1971] 2 A.T.R. 481.
6. [1978] 2 N.Z.L.R., at p. 480.
7. [1978] 2 N.Z.L.R., at p. 482.

On the other hand, a very different approach would appear to be taken in Canada. In Brooks v. The Queen [20] a Federal Court judge had occasion to consider the appeal of a solicitor who had sought a deduction in respect of a just proportion of the taxes, mortgage payments, and telephone expenses paid in respect of his home, the proportion being referable to the time spent in interviewing clients at his home in evenings. The provision of the Income Tax Act, R.S.C. 1952 Can., analogous to s. 51 (1), was to the effect that no deduction shall be made in respect of an outlay or expense "except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer" (s. 12 (1) (a)). In dismissing the appeal, Judge Grant cited with approval the following passage from an earlier case:

a taxpayer, in claiming a deduction for the business use of a room in his home, should be prepared to show that the room was definitely separate from the living quarters of his family and that he had forgone the personal use of part of his home for the sake of his business; that an appreciable amount of business was transacted in the room and that it was not just used for personal convenience; that there was a sign on his house announcing to the general public that his business was being conducted therein; that he had a telephone for business purposes; that, if he had a regular office, his home office was a second or branch office; etc. 1. (1978) 78 D.T.C., at p. 6505.

There is a very heavy onus on a lawyer who seeks to claim a deduction over and above the expenses applicable to his regular office, in connection with the use of a room in his home as an office study [21] . and added a reference to the decision of the Court of Appeal in England in Newsom v. Robertson [22] in support of the proposition that expenses must be "incurred wholly and exclusively for the purpose of the profession" [21] . 1. (1978) 78 D.T.C., at p. 6507. 2. [1953] 1 Ch. 7. 3. (1978) 78 D.T.C., at p. 6507.

In every case it is clearly a question of fact and degree whether the outgoing has the necessary relation to the gaining of assessable income. The formal agreement between the taxpayer and the trustees may give this case a complexion which is different from earlier cases and from Handley v. Commissioner of Taxation [23] which was argued shortly after this one. In the Supreme Court of Victoria, Murphy J. relied on the legal documentation to establish that the premises, being separately rented and used entirely for professional purposes, were simply not part of the home. The rent was not to be characterized as an outgoing of a capital, domestic or private nature, it was both incidental and relevant to the earning or producing of assessable income and had the essential character of a business outgoing.

The Federal Court likewise appeared to have no difficulty in concluding that the rent was both incurred in gaining or producing assessable income and necessarily incurred in the course of carrying on his profession for the purpose of gaining or producing such income. It was the price of his use of the study and ancillary space and facilities. That use was "for professional purposes, that is to say, working on briefs, reading for legal purposes, and otherwise in relation to the taxpayer's practice as a barrister". Their Honours then considered the question whether the outgoings were of a capital, private or domestic nature. They resolved that question in the negative on the basis that, even though the study and associated facilities could properly be regarded as part of the residence, the payments were not related either to the residence as a whole or to the general use by the taxpayer and his family of that residence as their home. The payments were thought to be more akin to the payment of the lighting and heating costs which, in Faichney [24] Mason J. found to be deductible for the reason that it was expenditure "incurred in providing light and heating for the taxpayer exclusively whilst he is engaged in work from which he derives income".

Mr. Shaw argues that the decisions of Walsh J. in Thomas [25] and of Mason J. in Faichney are distinguishable. If they are not distinguishable, then he submits that they should not be followed. The Federal Court thought that both decisions were clearly distinguishable. With all respect, I find both decisions to be applications of the "essential character" test propounded in Lunney [26] which are relevant and helpful to a resolution of the present problem. Of course, they do not necessarily dictate the answer.

(1972) 46 A.L.J.R. 397. 2. (1958) 100 C.L.R. 478.

I do not think that the legal documentation has the effect of making this a distinctive case. Paragraph 3, upon which Mr. Shaw places so much reliance, is not to be read in a vacuum. It must be read with par. 4, and when so read, and construed in the context of the layout of the house, it seems to me that the taxpayer occupied the entire premises as a family residence. It is true, of course, that a room and related facilities were reserved to be used for the purpose of his professional practice as a barrister, and a specific weekly sum was fixed as the price of such use. The result would have been the same if the agreement had fixed a global fee referable to the whole house, part of which could then have been related by evidence to the study and desk. The form of the agreement no doubt facilitates the proof of aspects of a claim in respect of the outgoings under s. 51; among other things, it renders resort to an apportionment unnecessary.

In my opinion, an important question is the relationship of the study and ancillary space to the house as a whole. There would appear to be complete integration, with no suggestion of any physical exclusivity. The study is indistinguishable from other rooms in the private living area of the house, and is so placed to the taxpayer's bedroom that he finds it convenient to keep his clothes in the study and use it as a dressing room. The ancillary space for a desk, where the taxpayer often works, is downstairs at the side of the living room. It would seem to be intimately related, in a physical sense, to the life of the family. These matters are not decisive in themselves. Other features of the arrangement are relevant though, again, not decisive. The taxpayer maintains chambers in the city. There is no compulsion for him to work at home, as was the case with the part-time lecturer in Banks [27] . Like many professional people, he finds it convenient to do so. The professional activity he engages in at home is mostly research and reading, presumably not requiring the services of a secretary. Resort to the house by clients and/or solicitors for the purpose of professional conferences is apparently so infrequent as to be immaterial.

As I have said, in the last resort the question is one of fact and degree. Having regard to all the circumstances, I conclude that it is not open on the facts of this case to find that the outgoings in question were incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on the taxpayer's professional business. The home was not his business premises. It was not open to be described, with any show of reality, as his base, or one of his bases, of operations, to use the term adopted by the Court of Appeal in Newsom v. Robertson [28] ; cf. Lunney [29] ; Horton v. Young [30] . The outgoings were therefore neither incidental nor relevant to the gaining of assessable income.

[1953] 1 Ch. 7. 2. (1958) 100 C.L.R., at p. 500. 3. [1972] 1 Ch. 157.

The relationship between the first part of s. 51 (1) and the exception of outgoings of a capital, private or domestic nature, was the subject of comment by Menzies J. in Federal Commissioner of Taxation v. Hatchett [31] :

My conclusion that the expenditure in gaining the Teacher's Higher Certificate was incurred in gaining assessable income in the circumstances carries with it the conclusion that the expenditure was not of a private nature. It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive. With respect, I can readily accept his Honour's statement. But it will be noted that it is confined to outgoings of a private nature. It is certainly not true of outgoings of a capital nature, as his Honour recognized when he said [32] : Section 51 does recognize that there will be outgoings incurred in gaining or producing income, or in carrying on a business to do so, that are of capital or of a capital nature. Expenditure of this sort is commonly made. Thus, for instance, a taxpayer who is a baker, who buys a van to deliver bread to his customers, makes such an outlay. Nor, in my opinion, should it necessarily be true of outgoings of a domestic nature. I see no reason why it would not be a proper application of s. 51 of the Act in the present case to say that if the proper conclusion on the facts was that the rent was prima facie an outgoing incurred in gaining or producing the assessable income then the exception with respect to outgoings of a domestic nature would operate to exclude it from deductibility. The meaning of "domestic" is "of or belonging to the home, house, or household" (Shorter Oxford English Dictionary). It seems to me to be plain, as a matter of common sense, that the taxpayer's agreement with the trustees is "of or belonging to the home, house, or household" and is therefore of a domestic nature notwithstanding that it provides for certain parts of the home to be occupied for professional purposes. 1. (1971) 125 C.L.R. 494, at p. 498. 2. (1971) 125 C.L.R., at p. 497.

As I have already noted, the learned members of the Federal Court agreed that the study and associated facilities could properly be regarded as part of the taxpayer's residence, but regarded as decisive against the Commissioner the fact that the payments were not related either to the residence as a whole or to the general use by the taxpayer and his family of that residence as their home. With all respect, I am unable to agree, for the reasons I have already outlined. The agreement itself coupled with the physical arrangements of the house and all the circumstances supply the necessary relation between the outgoings and the household to establish its domestic character. Their Honours then went on to find the rent "more akin" to the payment of the cost of lighting and heating the study in Faichney [33] than to the payment of part of the interest on the money borrowed to permit the erection of the house, and continued: "They were specifically and genuinely for the use by the taxpayer of the study and associated facilities for professional purposes, that is to say, for the purpose of earning assessable income." Not surprisingly, Mr. Shaw advanced an argument in similar terms. It seems to me, with respect, that to adopt a test in these terms is quite clearly to abandon the "essential character" test in favour of the "use" criterion preferred by the New Zealand Court of Appeal. It may be that the opinion that I have expressed could lead me in a proper case to a different conclusion with respect to the cost of lighting and heating to that reached by Mason J. in Faichney; on the other hand, it may be said at once that there would seem to be a closer connexion between such costs and the gaining of assessable income than is the case with the payment of rent in this case. The question must be as to the application of the exception. In any event, the general character of outgoings for lighting and heating was not canvassed before us, and I prefer to say nothing directly about them.

I would make one further comment, dealing with the effect of the words "to the extent to which" first appearing in s. 51 (1) in the context where there is an outgoing which requires to be apportioned between the gaining of assessable income and otherwise. In a case where the whole of that outgoing bears some association with the home, it is in my view a misconception to think that the result of the process of apportionment is necessarily to deny a continuing domestic character to the portion of the outgoing so identified. So to read the sub-section is to misread it.

At a glance

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Judgment (55 paragraphs)

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