Commissioner of Taxation v Payne

Commissioner of Taxation v Payne - [2001] HCA 3 - HCA 2001 case summary — Zoe

[12]

During the relevant years the taxpayer lived with his family on a rural property near Tamworth, where he carried on the business of deer farming. In the original proceedings that gave rise to the present appeal, the Administrative Appeals Tribunal found that the "farming operation [was] a considerable undertaking, carefully structured, conscientiously managed, deriving substantial gross income, and requiring the dedication of much time, skill, and experience". In addition to operating his deer farm, the taxpayer was employed by an international airline as a pilot. Because of the way in which the airline organised flying duties for its pilots, the taxpayer was usually able, in less than 25 days, to perform all of the work that his employer required of him over a 56 day period. As a result, he usually had more than 30 of every 56 days to devote to the farming business. When he had to report to Sydney airport for flying duties, the taxpayer travelled from the farm by car, bus and train. Once, when he had to travel to Sydney quickly, he flew to the airport by chartered aircraft. It was the expenses incurred in making these journeys which the taxpayer claimed as allowable deductions.
In December 1995, the Commissioner issued notices of amended assessment to the taxpayer in respect of each of the 1991 to 1994 years of income. Those amended assessments disallowed the deductions for travelling expenses and imposed penalties and interest. The taxpayer objected to those amended assessments. The Commissioner allowed the objections in part and, in March 1996, issued further notices of amended assessment. The taxpayer applied to the Administrative Appeals Tribunal for review of the Commissioner's decisions about the objections. The Tribunal decided that all the penalties imposed by the Commissioner should be remitted in full, but otherwise affirmed the Commissioner's decisions.
Pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth), the taxpayer appealed to the Federal Court of Australia. The question of law which was said to enliven the jurisdiction of the Federal Court was whether, on the facts found by the Tribunal, the Tribunal had erred in law in failing to determine that the taxpayer was entitled to the deductions he claimed.
At first instance in the Federal Court, Foster J allowed the appeal and ordered that the matter be remitted to the Tribunal for reconsideration[1]. From this decision the Commissioner appealed to the Full Court of the Federal Court. That Court dismissed the Commissioner's appeal[2]. The majority of the Full Court (Sackville and Hely JJ) held that "expenses of travel by a taxpayer between a place of business and another place of employment are capable of constituting allowable deductions"[3] pursuant to s 51(1) of the Act. The fact that the travel was between "two places of unrelated income derivation"[4] did not necessarily mean that the expenses were not allowable deductions. The other member of the Court (Hill J) dissented, concluding that the expenditure in question in this matter had "no connection with either income producing activity which the taxpayer [carried] on and [was] not a working expense of either activity"[5]. Accordingly, Hill J considered that the decision of the Tribunal revealed no error of law. By special leave the Commissioner now appeals to this Court.

[19]

The majority in the Full Court, and the primary judge, held that the Tribunal made an error of law in "concluding that the travel expenses were not incurred in gaining or producing assessable income by reason only of the fact that the travel was between two places of unrelated income derivation"[11]. The majority differed from the primary judge about what, if any, degree of connection a taxpayer would have to demonstrate existed between the two income‑earning activities for the expenses of travelling between them to be deductible. Expressions like "organisational connection", "synergy", "interrelationship", "agglutination", and "integration" were mentioned by the majority in the Full Court in describing the connection which the taxpayer asserted existed in this case[12]. Their Honours concluded that such a connection was neither necessary nor sufficient to characterise the costs of travel between the two places as being incurred in the course of gaining or producing assessable income, although such a connection was not "necessarily irrelevant"[13]. Whether travelling expenses were incurred in the course of gaining or producing assessable income was, their Honours said[14], essentially a factual question. Especially was that so where, as was the case here, the taxpayer happened to live at one of the two places of income derivation. The question in such a case was said to be one which may depend upon whether the predominant character of one of those places is as a place of business or a home, and upon the purpose underlying the journeys in question[15].
Accepting, as one must, that "the assessable income" referred to in s 51(1) is a broad concept, it may well follow, as the majority of the Full Court said, that "[t]he relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income"[16]. That is not to say, however, that the kind of connection which s 51(1) requires between outgoing and income is other than the connection described as "incurred in gaining or producing the assessable income". The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive of actual or expected income?

[26]

This is not to deny that s 51 recognises that there may be cases where only part of an outgoing can be said to have been incurred in (that is, in the course of) gaining or producing the assessable income. This, however, is not such a case. The conclusion that the travel occurred in the intervals between the two income‑producing activities, when the taxpayer was not engaged in either of them, denies the requisite connection between any part of the outgoing and the gaining or producing of assessable income.
The reference by Dixon CJ in Lunney to his misgivings "if the matter were to be worked out all over again"[27] was taken, in the argument of the present matter, as suggesting that the rule established in that case could not be supported logically. We do not accept that this is so, and it is not what we understand Dixon CJ to have said. As Dixon CJ pointed out, the question in Lunney was how an undisputed principle was to be applied. The principle which had to be applied in that case, and must be applied in this, is one which limits the allowance of a deduction for outgoings to those outgoings that are incurred in the course of deriving assessable income. It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way in which the legislation has been interpreted.
Moreover, the distinction has long been made and it is now too late for the Court to "rip it up" and treat the section as allowing any and all deductions having some causal connection with the derivation of assessable income. As cases like Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation[28], Ronpibon[29], and Fletcher v Federal Commissioner of Taxation[30] show, the distinction between outgoings incurred in the course of deriving income and other outgoings is a distinction which applies generally, not just in relation to travel expenses[31]. Once the distinction is recognised, it follows that the expenditure which was in issue in this case could not be held to be an allowable deduction.

[44]

The respondent to this appeal, the taxpayer, claims that his expenses of travelling between two places at which there occur distinct income‑producing activities are deductible pursuant to s 51(1). The taxpayer asserts that the outcome is not dictated by the result in Lunney, the claim there being one of the expenses of travel between the taxpayer's residence and place of work. The Commissioner contends that Lunney established or affirmed a "principle" which applied here; once it was established that the expenses were not incurred "in the course of" the taxpayer's activities whence he derived income, the expenses necessarily could not attract deductions under s 51(1).
The Administrative Appeals Tribunal ("the AAT") upheld the disallowance by the Commissioner of the taxpayer's objections to the disallowance of his claims to deductions in four years of income. The amounts were $2,092 (1991), $2,988 (1992), $5,337 (1993) and $5,093 (1994).
The "appeal" from the AAT to the Federal Court was, by reason of s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act"), restricted to questions of law. The particular question of law for the Federal Court was whether, on the facts as found, the AAT had erred in law in determining that the taxpayer could not be entitled to deductions in accordance with s 51(1) of the Act for his expenses of travel between the airport and the farm. The issue for the Federal Court was not whether the taxpayer was entitled to the deductions.
In the Federal Court, Foster J upheld the taxpayer's appeal and ordered that the matter be remitted to the AAT for reconsideration in accordance with his reasons. An appeal by the Commissioner to the Full Court was dismissed (Sackville and Hely JJ; Hill J dissenting)[36]. The matter was remitted by the Full Court to the AAT for reconsideration in accordance with law.
The facts are in fairly short compass and may be summarised as follows. In the relevant years of income, the taxpayer resided with his family on a grazing and farming property near Tamworth in New South Wales. The taxpayer conducted activities there associated with the farming of deer. He would not have lived at the farm had he not carried on the business there. The taxpayer also was a pilot employed by Qantas and based in Sydney at Mascot Airport. He had a number of years experience with Qantas and had achieved the rank of captain. For many years, he had commanded the control of international flights. The taxpayer's farming operation was a considerable undertaking which required the dedication of much time, skill and experience. The earnings of the taxpayer as a pilot were necessary for the financing of the farming activities. The taxpayer usually was able to organise his flying activities under the route allocation system employed by Qantas so that he was absent from the farm for about three days each week and present there for the remainder of the week.
The taxpayer's routine generally was constant and he travelled from the property to the airport approximately 40 to 50 times during each of the relevant years of income. When placed by the airline on stand‑by duty, the taxpayer usually minimised the risk of his being called from the property on short notice by travelling to and staying in the vicinity of the airport for the duration of the stand‑by period.
Before turning to consider the submissions to this Court, several points should be made respecting the nature and scope of the "matter" in respect of which the Federal Court exercised jurisdiction. First, the taxpayer did not seek to rely on the second limb of s 51(1), namely that the travel expenses were "necessarily incurred in carrying on a business for the purpose of gaining or producing [the assessable] income". Rather, he relied on the first limb of s 51(1), "losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income".
Secondly, as the majority in the Full Court emphasised[37], the AAT had divided its consideration of the first limb into two subsidiary questions. The first subsidiary question was whether the travel expenses were incurred in gaining or producing the assessable income; the second, if the first was answered in the affirmative, was the bearing, if any, upon the matter of the taxpayer's residence at the farm. Because the AAT answered the first question in the negative, it did not find it necessary to answer the second. The negative answer was sufficient to defeat the taxpayer's claims. The majority of the Full Court reached the opposite conclusion to the AAT on the first question, but that was insufficient to dictate the result that the taxpayer's claims to deductions should have been allowed.
The majority expressed its conclusion by saying that neither the AAT nor the Federal Court was precluded by authority from concluding that travel between two unrelated places of business or employment may be deductible pursuant to s 51(1). Their Honours emphasised that the sub‑section does not require that the assessable income which the relevant outgoing would be expected to produce is "confined to income from a particular job or a particular business"[38]. They also differed from the reasoning of Foster J, saying[39]:

[51]

Nevertheless, it is significant that, in Federal Commissioner of Taxation v Green[44], the taxpayer was successful in his claim for a deduction of what was a fair proportion of travelling expenses in visiting Townsville and Cairns from his residence in Brisbane to attend both to his interests in shop premises at those places and to church and masonic matters there. Several of the United Kingdom and Canadian decisions upon which the Commissioner relied, in particular Ricketts v Colquhoun[45] and Mahaffy v The Minister of National Revenue[46], turned upon statutory provisions the terms of which denied apportionment in circumstances where it might have been demanded by the terms of s 51(1). At all events, no question of apportionment has yet been considered by the AAT.
The result reached by the Full Court in this litigation resembled that reached by this Court in Steele v Deputy Commissioner of Taxation[47]. There, the order was that the matter be remitted to the AAT for rehearing of the appellant's appeal against the disallowance of her objection with or without the hearing of further evidence as the AAT might determine[48]. This situation may be compared with that in Lunney[49]. There, the High Court was exercising original jurisdiction and was not limited to the ascertainment of an error of law upon facts found by the Board of Review, the predecessor of the AAT. Rather, the taxpayers in Lunney bypassed the Board of Review and "appealed" directly to this Court (apparently under s 187 of the Act) against the disallowance of the deductions they had claimed. The result of this procedure was that the issues in dispute in Lunney were not before the Court in a piecemeal fashion. The question in Lunney was whether the sums in question were "deductible either wholly or in part"[50]. As has been indicated earlier in these reasons, that was not the question before the Federal Court in the present litigation, and it is not the question before this Court.
We turn to consider whether the majority in the Full Court was wrong in discerning an error of law in the dismissal by the AAT of the taxpayer's challenge to the disallowance of his claimed deductions. In our view, Sackville and Hely JJ were correct in the view they took and in the orders which were made requiring further consideration of the matter by the AAT.
The preposition "in" has been given much work to do by the decisions construing the phrase in s 51(1) "[a]ll losses and outgoings … incurred in gaining or producing the assessable income". What is required is a connection between the incurring of the losses or outgoings and the gaining or producing of the assessable income. As Professor Parsons put it[51]:

[64]

Further, to say that expenses which are no more than the costs of the movement of the taxpayer between a sole place of work and the place of residence are insufficiently connected with income derivation leaves unanswered the question of sufficiency of connection in other circumstances. For example, it already had been determined before Lunney, in Green[62], that the taxpayer had properly claimed as a deduction a proportion of the train fares from his home in Brisbane to North Queensland to inspect and supervise his shop properties there as an expense incurred in relation to the management of his income-producing enterprises. The management of the properties involved their inspection and supervision; while travelling north on the long haul from Brisbane, however, the taxpayer was not managing, inspecting or supervising the properties, and was not "travelling on work".
The "principle" to be derived from the holding in Lunney may be stated as being that expenses which are no more than the costs of the movement of the taxpayer between a sole place of work and the place of residence are insufficiently connected with income derivation to attract a deduction under the first limb of s 51(1). That outcome must be accepted, as Stephen J put it in Handley[63], not so much as a matter of logic but as "a question of adherence to well settled authority". But it is not determinative of the question of sufficiency of connection where what is involved is the expenses of movement between two or more places of work or business activity. Nor does it dictate the result where the taxpayer also resides at one of those places.
The Commissioner supports the division into two parts of the field upon which the governing legal principles are to be put in play. The classification then predetermines the outcome. The first field is identified as "travel on work" and the second as "travel to work". All then turns upon the reach of these propositions when applied to the facts. An expense in respect of the first category may have a sufficient connection with income derivation; an expense in respect of the second cannot be sufficiently connected with income derivation.
The criteria by which the facts are evaluated so as to assign the taxpayer's activities to one category rather than the other are assumed rather than articulated. The search for an "essential", in the sense of exclusive, character does not sit well with the statutory text. The text presupposes that losses and outgoings to some extent only may be incurred in the course of gaining or producing the assessable income, yet be sufficiently connected with them.
The expenses involved here may be described as having been incurred by the taxpayer for his travel between two places of income derivation so that he might derive assessable income at each. If the terminology of "essential character" is to be of continued use here, then it is an apt description of the conclusion just expressed. The AAT erred in finding that it was precluded by the holding in Lunney from concluding that the taxpayer's expenses here were incurred in gaining the taxpayer's assessable income.
In this regard, we adopt what was said by Sackville and Hely JJ in the following passage[64]:

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