Sydney, 1972, November 27, 28; December 15. 15:12:1972

APPEAL under s. 196 of the Income Tax Assessment Act 1936-1970 (Cth).

MASON J. delivered the following written judgment:-

This is an appeal by the Commissioner of Taxation from a Board of Review totalling $98 in the year ended 30th June 1970. The claim to deductions is made up as follows:

Proportion of interest payable under mortgage

of taxpayer's home attributable to his study $73.71

Proportion of electricity expenses attributable

to study 9.69

Depreciation on carpet in study:

15% on $40 6.00

Depreciation on curtains:

15% on $28.06 4.21

Depreciation on bookshelves and desk:

7 1/2% on $64.30 4.82

2. The taxpayer has been employed by the C.S.I.R.O. as a research scientist at its establishment at Prospect since 1st July 1968. He is a Bachelor of Science, Master of Science (Agriculture) and a Doctor of Philsosphy. He was a teaching Fellow in animal nutrition at the University of Sydney; he later specialized in that subject and became a full-time lecturer in animal husbandry at the University of Melbourne. He was awarded a C.S.I.R.O. overseas post-graduate award in the form of a fellowship course at Rowell, Aberdeen. (at p40)

3. The taxpayer was appointed as a research scientist in the Division of Animal Physiology to undertake research investigation into the digestion and intermediary metabolism of protection protein concentrates in relation to the growth of meat production. The Division has its headquarters at Prospect. The establishment there consisted of laboratories, a place for maintaining animals, office areas and a library. The taxpayer's laboratory, assigned to him two or three months after he commenced to work for C.S.I.R.O., is located in a prefabricated building about seventeen by twenty feet square. By reason of the situation of benches and extensive scientific equipment it has the character of a laboratory rather than an office. The taxpayer has a desk situated in a confined space in a corner of the laboratory and limited bookshelf space (three shelves) in which he keeps journals and some books. The laboratory is used during the working day by the taxpayer and his two assistants who carry out their experiments, including surgery, there. In addition there is constant traffic in and out of the laboratory which is not sealed from noise in the corridor immediately adjacent. (at p40)

4. The taxpayer was not required by the terms of his employment to perform the duties of his employment at home. Clause 26 of a document which sets out the conditions of employment of the staff of the C.S.I.R.O. provides that the ordinary hours of attendance are 36 3/4 hours per week, worked within the limits of 8 a.m. and 6 p.m. on Monday to Friday and 8 a.m. and 1 p.m. on Saturday. However, the nature of the project work in which the taxpayer was engaged was such that it was necessary at times to work outside normal hours in the laboratory. (at p40)

5. The taxpayer's duties required him to carry out research in his field. His work was not subject to day-to-day supervision. He was required also to publish his scientific research at C.S.I.R.O. in acceptable journals and to compile reports on his research for the organization. As well it was his duty to read the papers of scientific colleagues. The C.S.I.R.O. encourages its scientists to publish and recognizes that the scientist's record of publications is a very important factor in his securing employment, keeping his position and obtaining promotion. (at p41)

6. The taxpayer was informed, on taking up his duties, that most members of the staff arrived at 8.30 a.m. and left at 5.30 p.m. Dr. Ferguson, the Assistant Chief of the Division of Animal Physiology, gave evidence, which I accept, that a research scientist with C.S.I.R.O. could not do his job properly if he confined his work to the ordinary working hours. The taxpayer said, and I accept his evidence, that he spent an appreciable amount of time in his study at home, preparing papers, compiling reports, reading scientific journals and literature and reading the papers of colleagues in the C.S.I.R.O. prepared with a view to publication. This work was done at night during the week and at weekends. (at p41)

7. It is clear from what the taxpayer said that, in order to keep abreast of scientific advances and thinking relevant to his work and his special field of interest, it was and is necessary for him to undertake a considerable amount of reading. This took the form of reading extensively journals and other scientific literature which he obtained from the C.S.I.R.O.'s library at Prospect. (at p41)

8. The Commissioner sought to establish on the facts that the out-of-hours work undertaken by the taxpayer could be performed in his laboratory or in the library. It was suggested that he could return after dinner and work at night in his laboratory and the library or, alternatively, have dinner near his place of employment and work back without returning home. The relevance and practicality of these suggestions are not apparent to me, either immediately or after more protracted consideration. I am satisfied that it would be neither congenial, convenient nor practical for the taxpayer to have acted in accordance with these suggestions. His laboratory was neither an attractive, nor a particularly suitable, venue for the kind of work which he did at home. (at p41)

9. The taxpayer's case on the facts which I accept is that, in planning his home at Baulkham Hills, he decided to incorporate a study because he was aware that his work as a scientist with C.S.I.R.O. would involve him in working at home at night and at weekends. He built a four bedroom home, intending that one bedroom, having an area of ten feet by ten feet, should serve as a study. The cost of the land and house was $15,000 of which $14,000 was borrowed from the Australian Mutual Provident Society. Of the interest payable under the mortgage in the year ended 30th June 1970 the sum of seventy dollars was arrived at as the amount of interest referable to the study, having regard to the proportion which it occupied of the total floor area of the house. (at p42)

10. The bedroom which was set up as a study was furnished with a carpet and curtains. In it there were the taxpayer's desk, a chair and a bookshelf eight feet in height and having a width of six feet and situated against one wall of the room. In addition there was a piano which had been given to the taxpayer's wife by her mother and for which there was no other available space in the house. (at p42)

11. Except occasionally the study was used by the taxpayer and then almost wholly for the activities to which I have referred. In the bookshelf three feet of space was allocated to papers which his wife kept. In the remainder of the space the taxpayer kept some two dozen general scientific textbooks and scientific papers. Although the evidence is not precise, it seems that this material occupied some twelve feet of the bookshelf. In addition it contained some books relating to philosophy. It appears that in the course of the work which he did at home the taxpayer referred to the scientific books and papers, but to a limited extent only. The taxpayer commenced at the C.S.I.R.O. at a salary of $6,200 a year. He passed what is known as the efficiency bar, being a level of competence which a research scientist must reach before qualifying for higher promotion. On passing the bar on 1st July 1971 he was reclassified as a senior research scientist and now receives a salary of $10,200. His success in his work and in his promotion are no doubt partly attributable to his conscientious pursuit of his duties, to the work which he does at home and to the extensive scientific reading which he undertakes. (at p42)

12. It has been agreed between the parties that no question arises as to the correctness of the amount of each of the deductions claimed. The Commissioner agrees that if the taxpayer is entitled in law to a deduction in respect of each item then he should receive a deduction for the amount claimed. However, in expressing that agreement the Commissioner wishes it to be understood that he does not necessarily accept the basis on which the amount of the deduction has been arrived at, or calculated, by the taxpayer. (at p42)

13. There has been some debate concerning that part of the taxpayer's activities at home which consist of reading scientific literature and articles. It has been argued for the Commissioner that in so far as that reading is not relevant to the actual work on which the taxpayer is engaged in his employment and serves only to equip his mind with knowledge, it is not an activity involved in the gaining or production of assessable income (see Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60, at pp 67-68, 69-70 ; Federal Commissioner of Taxation v. Hatchett [1971] HCA 47; (1971) 125 CLR 494, at pp 497-498 ). By reason of the agreement as to the amounts claimed by the taxpayer it is unnecessary for me to explore this question. In any event the evidence does not enable me to say with precision how much of the taxpayer's work at home fell within the narrower concept of what is incidental to the employment and how much fell outside that narrower concept. It is sufficient for me to say that on any view I am satisfied that the taxpayer 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. (at p43)

14. It is convenient, in the first instance, to deal with the claim to deduct a proportion of the interest payable under the mortgage. The question is whether part of the interest is a loss or outgoing within the meaning of s. 51 (1) of the Income Tax Assessment Act 1936-1969, and that largely turns on whether the interest payment under the mortgage is a loss or outgoing "of a capital, private or domestic nature", that being a loss or outgoing which is excepted by the sub-section from the deductions which it allows. I should not wish it to be thought from this statement of the question that it is my opinion that the interest would otherwise constitute an outgoing within the first limb of the sub-section. I am inclined to the view that it would fall outside the provision. However, it is more convenient to examine the application of the exception. (at p43)

15. 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. The view which I have expressed is, I think, in accord with the decision of Walsh J. in Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397 , 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. His Honour rejected the claim and in so doing said (1972) 46 ALJR, at p 399 :

"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, in so

far as it was the outgoing connected with the cost of extensions

to the house was, in my opinion, 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." (at p44)

16. In the course of argument reference was made to expenditure incurred by a doctor in erecting a house which contained his surgery or for the purpose of renovating a house containing such a surgery. In my opinion there is no analogy between the example given and the circumstances of the present case. As I have said, a study does not cease to be part of a taxpayer's home because it is used by the taxpayer for the pursuit of activities from which he earns his income. However, the doctor's surgery is not in a relevant sense part of his home; it is his place of business, if I may be permitted so to describe the premises at which a doctor carries on his profession. (at p44)

17. The claim for expenditure on light and power is also to be decided by reference to s. 51 (1). The Commissioner has submitted that expenditure by a taxpayer on light and heating is deductible only if the light and heating are provided for the benefit of the taxpayer's clients or customers, not if they are provided for the taxpayer's sole benefit. A concession is made for the case where the climate is so cold and rigorous that heating is essential to enable work to be done. This is a Spartan view of s. 51 and in my opinion it is quite incorrect. (at p44)

18. The question is whether expenditure for the provision of light and heating for the taxpayer at home whilst he was pursuing activities from which he derived income is an allowable deduction. There is, I think, no doubt that the expenditure is an outgoing within the opening words of the sub-section; the question is whether it is an outgoing of a private or domestic nature by reason of the circumstances that the light and heating are provided at the taxpayer's home. (at p44)

19. I would answer that question in the negative. There is no definition of the expression "private or domestic nature". However, the examples of expenditure of a private or domestic nature which leap to the mind are those which could not conceivably be incurred in gaining assessable income, e.g. the expense of private entertainment or rent paid for the taxpayer's dwelling-house. As Menzies J. said in Commissioner of Taxation v. Hatchett (1971) 125 CLR, at p 498 : "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." (at p45)

22. Many expenses of a private or domestic character relate to the taxpayer personally, but it does not follow that because the purpose of the expense is to provide suitable working conditions for the taxpayer himself it falls within the exception. The cost of providing heating or airconditioning in a taxpayer's office is in my opinion an allowable deduction, notwithstanding that its principal purpose is to provide suitable conditions in which the taxpayer may work. (at p45)

21. It may be acknowledged that expense incurred in the provision of light and heating in the taxpayer's home is normally an expense of a private or domestic nature, dissociated from the gaining or production of assessable income. However, to the extent to which the expenditure is incurred in providing light and heating for the taxpayer exclusively whilst he is engaged in work from which he derives income it may be said to be an expense having a business or employment character. By reason of that circumstance it is not an expense of a private or domestic nature. If, however, the light and heating are provided, not exclusively for the taxpayer's benefit whilst he is working, but also for the members of his family, the expenditure continues to have a private or domestic character and to that extent falls within the exception to s. 51 (1). (at p45)

22. The agreement reached by the parties as to amount relieves me from inquiring into the manner in which the heating came to be provided. It is enough that light and heating was provided in the study whilst the taxpayer was working on matters which fell within the scope of his employment. In that respect the expenditure differs from costs incurred in providing the study, for in that case what is provided retains its essential character as part of the taxpayer's home. (at p45)

23. The remaining claims are to be decided by reference to s. 54 and s. 61. The Commissioner submitted that the carpet and curtains were not "articles" within the meaning of s. 54 (1) on the ground that the word describes only those articles which are appropriate to income-producing activities. It was conceded that carpets and curtains, if situated in business premises, are articles within the meaning of the sub-section, but it was submitted that if situated in the taxpayer's home, they do not answer the description. In my opinion the language of the section gives no support to the submission or to the suggested distinction. (at p46)

24. The argument is little more than a reiteration of the contention which was rejected by Taylor J. in Quarries Ltd. v. Federal Commissioner of Taxation [1961] HCA 69; (1961) 106 CLR 310 . There it was contended that the meaning of "articles" in s. 54 (1) should be restricted by reason of its association with "plant". In rejecting the argument his Honour said (1961) 106 CLR, at p 316 :

"I see no reason for denying to the word 'article' the

comprehensive meaning which it normally bears or for thinking

that it was not used in the section by way of extension ..."

"... all 'plant' and all 'articles' are within the section if

they may fairly be said to be used for the purpose of producing

assessable income."

25. The word "article" according to the Shorter Oxford Dictionary bears the meaning "a piece of goods or property". The word would, I think, according to its normal and ordinary meaning include a carpet or curtain, a desk and a bookshelf. They were owned by the taxpayer in the year ended 30th June 1970. (at p46)

26. The question is whether they were "used by him during that year for the purpose of producing assessable income". In the light of the taxpayer's evidence which I accept, there can be no doubt that the desk and, in part, the bookshelves were used by the taxpayer in the year in question in gaining assessable income. (at p46)

27. The Commissioner sought to avoid this conclusion by submitting that in order to bring s. 54 (1) into operation it must be shown that the use of the article for the purpose of gaining assessable income was a significant use and that it was not de minimis. It is necessary to bear in mind that s. 61 contemplates that use of an article for the purpose of producing assessable income may constitute part only of its use and that in this event the taxpayer shall receive only such part of the deduction otherwise allowable as in the opinion of the Commissioner is proper. There is therefore no room for implying that the use of which s. 54 (1) speaks is the predominant use. It is enough if the taxpayer can show that there is a use for the specified purpose, in which event it is for the Commissioner under s. 61 to decide what proportion that use bears to the total use. Here no question arises under s. 61; it is enough that on the evidence there was a use by the taxpayer of the desk and the bookshelves for the purpose of gaining assessable income and that on the evidence that use was not so slight that it should be disregarded. In my opinion, therefore, the taxpayer's claim so far as it relates to the desk and bookshelves should be upheld. (at p47)

28. The carpet and the curtains give rise to more difficulty. The use which the taxpayer made of them for the purpose of gaining assessable income derives from the use which he made of the room for the purpose. Section 54 does not exclude articles of a private or domestic nature; it requires only that the articles (if owned by the taxpayer) should be used for the stated purpose. In my opinion they were used for that purpose and the taxpayer's claim should be upheld. (at p47)

29. In the result I uphold the Commissioner's appeal in relation to the sum of $73 paid for interest and I dismiss it in relation to the other items of expenditure. The assessment should be amended accordingly. The Commissioner has agreed to pay the taxpayer's costs in any event. (at p47)

Appeal allowed in relation to the sum of $73 paid