issues on the appeal
30 The main submission made by the applicant was that the Tribunal erred in law in deciding that the expenses of $36,124 were not deductible expenses within s 30(1) of the FBTAA. He submitted that had that decision been made the allowance of $18,000 would not have been characterised as a living-away-from-home allowance and would have been held to be part of the applicant's income. He submitted that that aspect of his appeal was an appeal on a question of law because the facts were not challenged and the only question was whether the expenses as found were deductible expenses within s 8-1 of the ITAA 1997.
31 The respondent did not argue that this aspect of the applicant's appeal was not an appeal on a question of law and I think that he was correct to take that approach.
32 In order to consider the applicant's main submission it is necessary to examine the cases which have addressed whether travelling expenses and the expenses of accommodation and food and sustenance are allowable deductions.
33 In Lunney v Commissioner of Taxation of the Commonwealth of Australia; Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478 the High Court decided that the costs of an employee travelling to and from his or her place of employment, or the costs of a business proprietor travelling to and from his or her place of business, were not losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Had they been, they would have been allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature. Although the relevant section is now s 8-1 of the ITAA 1997 and not s 51(1) of the ITAA 1936, the principles remain the same (Commissioner of Taxation of the Commonwealth of Australia v Day (2008) 236 CLR 163 at 175 [21] per Gummow, Hayne, Heydon and Kiefel JJ).
34 The plurality of Williams, Kitto and Taylor JJ discussed the relevant principles. The plurality noted the various tests which had been formulated in the cases including whether the expenditure was incidental and relevant to the operations or activities regularly carried on for the production of income. The plurality said that the test is not one of considering whether the expenditure is necessary if assessable income is to be derived. The statutory test focuses more on the essential character of the expenditure itself. Their Honours said the character or colour of the expenditure in the case before them was not that of a business expense, but rather a personal or living expense. It was expenditure incurred as a necessary consequence of living in one place and working in another.
35 In Federal Commissioner of Taxation v Charlton (1984) 71 FLR 107 Crockett J of the Supreme Court of Victoria was called upon to consider whether a medical practitioner whose family home was in an inner Melbourne suburb could claim as an allowable deduction the rent he paid on a flat in Bendigo which he used in the course of regular trips to Bendigo where he performed autopsies.
36 The question before Crockett J was whether the rental or outgoing paid in relation to the flat was incurred in gaining or producing the taxpayer's assessable income. His Honour decided that it was like the expense of travelling to and from work and not deductible. He said (at 114):
… if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he, not only needs to incur expense in travelling to that place but, also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible.
37 That proposition was supported by the decision in Ricketts v Colquhoun [1926] AC 1, a decision which Crockett J said must be treated as carrying the approval of the High Court. Crockett J concluded on the facts (at 115) that:
The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations.
38 In Commissioner of Taxation v Cooper (1991) 29 FCR 177 the Full Court of this Court was required to consider whether a professional footballer, who at the insistence or request of his coach had incurred costs on food and drink additional to his staple diet, was entitled to deduct those costs as outgoings under s 51(1) of the ITAA 1936. A majority of the Court (Lockhart and Hill JJ; Wilcox J dissenting) held that the costs or outgoings were not allowable deductions.
39 Lockhart J held that the relevant test was to determine the essential character of the expenditure and that that was to be applied in determining whether the expenditure was incurred in the course of gaining or producing assessable income and in determining whether the expenditure was of a capital, private or domestic nature. Lockhart J said (at 183-184):
These are the relevant principles to apply in determining the deductibility of the taxpayer's expenditure in this case. The application of s 51(1) gives rise to difficulty in some cases because there is a large variety of factual situations to which it may apply. The deductibility of expenditure on food, clothing and housing poses difficult questions. In one sense expenditure on food is always relevant to the derivation of income because a person must eat to enable him to live and therefore to work. Obviously that alone is not a sufficient connection with the earning of assessable income to permit a deduction. On the other hand a person whose business is the publication of a food guide may buy and taste food in the course of his business, so there is a clear nexus between the expenditure and the derivation of income. The cases that lie in between the two extremities give rise to the difficulty and this case is one of them.
40 His Honour made the point that it is not enough that the expenditure is necessary if assessable income is to be derived. His Honour said (at 185):
Food and drink are essential to sustain life. Diet, metabolism and the propensity to put on weight varies from person to person. The quality and quantity of food and drink consumed by professional footballers doubtless varies considerably from one to another. Some would maintain their desired weight by eating more than others. Some would not have difficulty in maintaining weight by eating less than others. It would be a curious result if some professional footballers obtained a deduction for expenditure on basic items of food and drink and others did not because the former chose to consume more than the latter, whether pursuant to an "instruction" of their coaches or not.
The taxpayer incurred the expenditure on additional food and drink for the purpose of increasing his weight and thus to play professional football and earn assessable income. But its character as the cost of additional food and drink is neither relevant nor incidental to the training for and playing of football matches, which is the activity by which he gained assessable income. The expenditure was not incurred in or in the course of that activity. The taxpayer was paid money to train for and play football, not to consume food and drink. His income-producing activities did not include the consumption of food and drink.
41 His Honour concluded that the expenditure was not incurred in gaining or producing the taxpayer's assessable income. Furthermore, his Honour concluded that the expenditure was of a private nature.
42 Hill J also referred to the relevant authorities and said that the expenditure was not incurred in gaining or producing the taxpayer's assessable income because the income-producing activities were training for and playing football and did not include the taking of food, although unless food was eaten, the player would be unable to play. His Honour also said (at 200):
Expenditure on food, even as here "additional food" does not form part of expenditure related to the income-producing activities of playing football or training.
43 Hill J also said that expenditure was of a private nature. He said (at 201):
Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work related entertainment or expenditure incurred while away from home. No such circumstance, however, intervenes here. In particular, the mere fact that Mr Masters suggested or even directed Mr Cooper to eat particular food does not convert the essential character of the food as private into a working expense.
44 Wilcox J dissented. His Honour did not disagree with the test applied by the majority but said that on the facts the relevant "nexus" between the expenditure and the assessable income was established. His Honour also said that the expenditure was not of a private nature.
45 In Commissioner of Taxation of the Commonwealth of Australia v Payne (2000) 202 CLR 93 the High Court was called upon to consider whether a taxpayer's travelling expenses in moving between two unrelated places of employment were allowable deductions within s 51(1) of the ITAA 1936. A majority (Gleeson CJ, Kirby and Hayne JJ; Gaudron and Gummow JJ dissenting) decided that they were not.
46 The majority noted that the section was not expressed in terms of outgoings incurred "in connection with" the derivation of assessable income or outgoings incurred "for the purpose of" deriving assessable income. The majority said that in considering whether outgoings were incurred in the course of gaining or producing assessable income it is appropriate to apply the test stated in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47. That test involved the question of whether the occasion of the outgoing should be found in whatever is productive of actual or expected income.
47 The majority said that the expenses were not incurred in the course of the taxpayer's employment as a pilot or in the course of his deer farming business. Their Honours said that the expenses were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived and that in that respect they were no different from expenses incurred in travelling form home to work (at 101-102 [14]). Their Honours also said that the distinction between outgoings incurred in the course of deriving income and other expenses was a distinction which applied generally and not just in relation to travel expenses (at 102-103 [17]).
48 In Commissioner of Taxation of the Commonwealth of Australia v Day the High Court was called upon to consider whether expenses incurred by a taxpayer who was a customs officer and who faced charges under the Public Service Act 1922 (Cth) were allowable deductions under s 8-1 of the ITAA 1997. A majority (Gummow, Hayne, Heydon and Kiefel JJ; Kirby J dissenting) held that they were. Their Honours said that expressions found in the cases such as the expenses being "incidental and relevant" to the income producing activities or the expenses having an "essential characteristic" should be approached with some caution and should not be used to unduly expand or narrow the words in s 8-1(1)(a) (178-179 [29]). Their Honours also made the point that the words of s 8-1(1)(a) are intended to cover many factual and legal situations and it is not possible to have one formula capable of application to the circumstances of each case. Their Honours endorsed "the occasion of the outgoing" question as a guide and said that critical to the inquiry was a determination of what it was that was productive of assessable income (at 179 [30] [31]).
49 As I have said, the applicant put at the forefront of his submissions the reasons for judgment of Hill J in The Roads and Traffic Authority of New South Wales v Commissioner of Taxation and in particular, the following passages (at 240):
Where a taxpayer is required by his employer, and for the purposes of his employer, to reside, for periods at a time, away from home and at the work site, and that employee incurs expenditure for the cost of sustenance, or indeed other necessary expenditure which, if the taxpayer had been living at home, would clearly be private expenditure, the circumstance in which the expenditure is incurred, that is to say, the occasion of the outgoing operates to stamp that outgoing as having a business or employment related character.
…
The facts of the present case are quite different. First, each of the persons deemed hypothetically to have incurred the expenditure are employees. They are not carrying on their own business. Secondly, they are required, as an incident of their employment, by their employer and for the purposes of the employer to live close by their work site for relatively short periods of time. No question arises of their choosing to live in these places. Each of the persons in question has a permanent house in which he lives when not in camp. None of the employees spend inordinate periods of time in the camps so that the camp becomes their home. Their house is retained and the employees in question travel home at weekends. They do not remain in the camps. The costs in question here are an incident of the employment. The costs in Toms were not.
50 Those passages must be read in the context in which they were made. There are two factual matters which distinguish The Roads and Traffic Authority of New South Wales v Commissioner of Taxation from this case. First and importantly, in that case the employees were required to live in the camp. In this case, the applicant chose to live in South Australia and to travel (and stay) in Port Hedland for the purpose of his employment. Secondly, the additional expenses in that case were relatively modest additional costs of food "beyond the cost of living in [the employees'] own homes and perhaps other expenses caused to them by camping". In this case, the "additional expenses" are the cost of accommodation and food and sustenance.
51 I briefly restate the main facts. The applicant is an electrician by occupation. He was employed by Downer EDI as a leading hand maintenance electrician at or near Port Hedland. The applicant's usual place of residence was in South Australia. He paid his airfares from Adelaide to Perth and Downer EDI paid for his travel from Perth to Port Hedland. The applicant incurred losses and outgoings for accommodation and food and sustenance while staying in temporary accommodation in Port Hedland.
52 The cases to which I have referred strongly suggest that the losses or outgoings in relation to accommodation (i.e., in this case rent) and food and sustenance were not incurred in the course of gaining or producing assessable income. As far as accommodation is concerned, Federal Commissioner of Taxation v Charlton is directly on point. Like the taxpayer in that case, the applicant chose to reside so far away from his place of employment that he incurred accommodation as well as travelling expenses. Like the travelling expenses, the accommodation expenses are not deductible. As far as food and sustenance is concerned, although the deductibility of expenditure on food can pose difficult questions, I do not think it does in this case. The income producing activities of the applicant were those associated with his work as an electrician. To adopt the approach of Lockhart J in Commissioner of Taxation v Cooper, the applicant was employed to perform the functions of a leading hand maintenance electrician at Downer EDI's Port Hedland site, not to consume food and drink. The decision in The Roads and Traffic Authority of New South Wales v Commissioner of Taxation is distinguishable. The food expenditure in that case was the additional cost of food by reason of living in the camp and the employees had no choice but to live away from home. In this case, the applicant could have had his usual place of residence in Port Hedland.
53 The application of the test of whether the occasion of the expenditure on accommodation and food and sustenance is to be found in the applicant's activities as a leading hand maintenance electrician leads to the same result. The occasion of the expenditure is the applicant's choice to live in South Australia rather than in Port Hedland.
54 In my opinion, the expenses of $36,124 were not incurred in gaining or producing the applicant's assessable income and were not deductible expenses within s 8-1(1)(a) of the ITAA 1997. It is not necessary for me to consider whether the expenses were of a private nature within s 8-1(2)(b) (Handley v The Commissioner of Taxation of the Commonwealth of Australia (1981) 148 CLR 182; Commissioner of Taxation v Cooper). As the expenses were not within s 8-1(1)(a), they were not "deductible expenses" within s 30(1) of the FBTAA. The allowance of $18,000 fell within s 30(1) and the Tribunal did not err in so concluding.
55 The applicant submitted that even if his main challenge to the Tribunal's decision should fail, nevertheless the Tribunal erred in law in concluding that the base penalty amount should be worked out on the basis that the shortfall amount resulted from recklessness by the applicant or his agent. In other words, the challenge was to the Tribunal's characterisation of his conduct as amounting to recklessness rather than to whether the pre-requisites for the imposition of a shortfall penalty were satisfied.
56 The Tribunal referred to the observations of Cooper J in BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164 (at [77]) as follows:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
57 This statement was referred to with approval in Federal Commissioner of Taxation v R & D Holdings Pty Ltd (2007) 160 FCR 248 at 260-261 [70] per Heerey and Edmonds JJ; 270 [109] per Stone J (see also Howard v Commissioner of Taxation [2012] FCAFC 149 at [56] per Middleton, Perram and Dodds-Streeton JJ).
58 It is clear then that the Tribunal stated the law correctly. I have set out above a passage from the Tribunal's reasons where it applies the law to the facts (at [28]). There were matters suggesting a lesser fault characterisation than recklessness. There were the passages in the reasons for judgment of Hill J in The Roads and Traffic Authority of New South Wales v Commissioner of Taxation and the fact that the allowance of $18,000 was included in the applicant's assessable income. However, the difficulty for the applicant is that I cannot detect any error of law in the Tribunal's approach. It stated the law correctly and in view of the material from Downer EDI it cannot be said that there was no material to support its conclusions. I do not think the applicant's appeal in relation to the Tribunal's characterisation of his agent's conduct as reckless is an appeal on a question of law.
59 There is no other error of law in the Tribunal's approach to penalty.