Handley v Commissioner of Taxation

High Court of Australia|1981-04-01|Before: Wilson JJ, Stephen J, Wales Yeldham J

The application of the provisions of s. 51 (1) gives rise to difficulty in some cases. That is because there is an infinite variety of factual situations to which it may apply. It is not always easy to distinguish one case from another when, in order to apply the section, it is necessary to take a number of factors into account. But I should have thought that the present case is clearly distinguishable from the self-contained doctor's surgery and the grocer's shop upon which so much reliance was placed by the taxpayer in argument, notwithstanding that they form part of a building which contains a residence.

Likewise, the English decisions are also to be distinguished. They are based on different statutory provisions and the observations of Lord Upjohn and Lord Donovan in Korner v. Commissioners of Inland Revenue [35] merely reflect what was the practice of the Commissioners under the English legislation.

The burden of proving that an assessment is excessive is on the appellant taxpayer (see Income Tax Assessment Act 1936, s. 190 (b): Macmine Pty. Ltd. v. Federal Commissioner of Taxation [37] ; McCormack v. Federal Commissioner of Taxation [38] ). Section 51 of the act provides:

(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.

Thus, the section contemplates that an outgoing incurred in gaining assessable income (or necessarily incurred in carrying on a business for the purpose of gaining such income) may not be an allowable deduction because it is of a domestic nature. Therefore the question whether an outgoing is not allowable because of this exception is not answered by showing that it is incurred in gaining assessable income. The further exception relating to exempt income is anomalous and unnecessary, because such an outgoing would not be allowable under the principal clause which is limited to outgoings incurred in gaining or for the purpose of gaining assessable income (see Ronpibon Tin N.L. v. Federal Commissioner of Taxation [39] ). The insertion of this exception may be attributed to an intention to emphasize this point. 1. (1979) 53 A.L.J.R. 362; 24 A.L.R. 217; 9 A.T.R. 638; 79 A.T.C. 4, 133. 2. (1979) 143 C.L.R. 284. 3. (1949) 78 C.L.R. 47, at p. 56.

The taxpayer's study was used so that he could do some of his work at home. The taxpayer, like most other income earners with a family, had to spend most of the week days away from home engaged in his earning activities. He therefore wished to spend his evenings and week-ends amid his family in circumstances where he could work if he wished, rather than in his professional chambers. Any outgoing incurred for this purpose was of a domestic nature even if it were incurred in earning assessable income.

As Mason J. said in Federal Commissioner of Taxation v. Faichney [40] : "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."

Mason J. considered this view to be in accord with the decision of Walsh J. in Thomas v. Federal Commissioner of Taxation [41] , where he held that payment of interest by a barrister connected with a loan for the cost of extensions to his house which included a study for professional purposes, was an outgoing "of a capital, private or domestic nature". Walsh J. considered that it did not lose that character merely because the barrister "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."

(1972) 46 A.L.J.R. 397, at p. 399; 3 A.T.R., at p. 168; 72 A.T.C., at p. 4097.

In my opinion it would make no difference if other members of the taxpayer's family never entered the study and if it were exclusively devoted to his study of briefs or more general legal studies connected with his profession. Even if the barrister's study were removed to a building adjacent to or near to his home, this may not be enough to change the domestic nature of the outgoings in connexion with it.

These are all questions of degree. In practice a strong pointer is whether there is some other place where the work could be done and whether the doing of it at home is really for the domestic convenience of the taxpayer. There are circumstances in which a barrister's outgoings in connexion with part of his home would not fall within the exception of outgoings of a private or domestic nature, for example if part of the home were actually used for professional chambers. If the part of a home used in gaining assessable income were in a real sense a place of business, this would in general mean that the outgoing (even if some apportionment were called for) would be allowable. Thus, the case is quite different from that of a doctor, a marriage celebrant, a caterer, an author or a solicitor who uses part of his or her home as a place of business. This reference to place of business is not intended to be exhaustive; it may be sufficient but not necessary that the outgoing is referable to a place of business, for it to be an allowable deduction.

Acceptance of the taxpayer's claim could lead to curious or even absurd results. Many lawyers, to the annoyance of their domestic partners, do a lot of legal reading in the bedroom. Also there is much scientific and anecdotal evidence in favour of the view that intellectual work goes on subconsciously as well as consciously, even during sleep. Perhaps the next claim would be for deducting part of the upkeep of the bedroom, or even a claim for part of the upkeep of the garden in which a barrister thinks about the conduct of cases whilst resting or strolling.

The words "to the extent" in the domestic exception in s. 51 (1) require apportionment in cases where the outgoing is not wholly allowable, because it is to some extent of a domestic nature. An example might be where part of a barrister's home was used as professional chambers for several days only of the week and was used at other times for purposes of a domestic nature (income earning or not). In the present case apportionment is not required because the outgoings are entirely of a domestic nature. The appellant claimed that the allowance by the Commissioner of apportioned amounts for heating and cleaning of the study is inconsistent with the disallowance of the disputed amounts for interest and insurance. In my opinion there is force in this contention, but the correctness of the allowance for heating and lighting is not open for decision in this appeal.

In this matter I have had the advantage of reading the reasons for judgment of my brother Stephen. I agree with his reasons and his conclusion. There are however three aspects on which I wish to add a comment.

The taxpayer claimed and the Commissioner allowed a deduction of an apportioned part of the taxpayer's expenditure for electricity and house cleaning costs for the house as a whole. I find the allowance of such amounts difficult to reconcile with the disallowance of an apportioned part of interest, rates and insurance payable by the taxpayer.

The second matter arises from the fact that some reliance was placed in argument by Counsel for the Commissioner on the distinction between the purpose for which an item of expenditure has been made and the essential character of the expenditure. It was submitted that the latter was the relevant test. This distinction was drawn in Lunney v. Federal Commissioner of Taxation [42] in the judgment of Williams, Kitto and Taylor JJ. With due respect I am unable to regard their Honours as having excluded as irrelevant the purpose of the expenditure. Moreover I find it difficult to see how the essential character of an item of expenditure can be ascertained except by reference to the character of the item upon which it was incurred, and in one sense at least that must involve an examination of the purpose of the expenditure, both immediate and remote. That will involve an examination of the nature of the consideration received for the expenditure, its relationship to the income-earning activity and the purpose which it serves in that activity. It is clear from the joint reasons in Lunney's Case that the nature of the expenditure is not to be taken as the only test or for that matter to exclude recourse, where it is useful, to the purpose for which the expenditure has been incurred. The same would doubtless be true of other so-called "tests" of deductibility such as the use to which the study is put in order to produce income. It is clear that their Honours were not laying down any simple formula which would delimit with precision the scope of s. 51 (1). As my brother Stephen has rightly observed the only criterion of deductibility is the wording of the section itself. He has also made it clear that in this context there is no necessary conflict between the factors such as use and the determination of the essential character of the payment.

Leaving to one side for the moment Thomas v. Federal Commissioner of Taxation [43] and Federal Commissioner of Taxation v. Faichney [44] , which decisions have been called into question in these proceedings, where decisions of this Court have denied deductibility in the case of outgoings of a private or domestic nature it has been on the basis that they were not incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income, rather than that they were to be excluded as deductions because, although of that character, they were also of a private or domestic nature. In Thomas and Faichney and also Lodge v. Federal Commissioner of Taxation [45] no concluded view was expressed by the trial judge on the question whether the expenditure was incurred in gaining or producing assessable income or necessarily incurred in carrying on a business; the decisions were based on the expenditure being of a private or domestic nature. In Ronpibon Tin N.L. v. Federal Commissioner of Taxation [46] it was pointed out that the express exclusion of expenditure incurred in gaining exempt income operated to exclude something which could not fall within the opening words of s. 51 (1), but that expressly to exclude losses and outgoings of capital was both logical and necessary because such losses and outgoings could none the less be incurred in the course of carrying on a business or gaining or producing income.

(1972) 46 A.L.J.R. 397; 3 A.T.R. 165; 72 A.T.C., at p. 4094. 2. (1972) 129 C.L.R. 38. 3. (1972) 128 C.L.R. 171. 4. (1949) 78 C.L.R. 47, at p. 56.

There has been no decision of this Court which characterizes expenditure of a private or domestic nature in that way. Logic would seem to suggest that expenditure incurred on private or domestic matters could not be incurred in gaining or producing assessable income but, as appears from the observations in Ronpibon , and in John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [47] , strict logic has not been the sole guide of the draftsman. The fact that s. 51 (1) both permits and requires dissection and apportionment of expenditure by the use in the opening words of the expression "to the extent to which they [i.e. "all losses and outgoings"] are incurred in gaining or producing the assessable income" suggests that some expenditure may be of a mixed character such that it must be apportioned so as to ascertain that amount which can be regarded as expended in gaining or producing assessable income or carrying on a business. Thus the exclusion of expenditure made on, or in so far as it is on, private or domestic matters comes from the requirement of the opening words of s. 51 (1) which limit deductions to expenditure incurred in gaining assessable income. The express exclusion in the closing words of the sub-section of expenditure of a private or domestic nature has the same character as the exclusion of expenditure in gaining exempt income; it must be regarded as having been inserted by way of precaution or emphasis - cp. the discussion by Menzies J. in Federal Commissioner of Taxation v. Hatchett [48] . The fact that the opening words impliedly exclude that which is not incurred in gaining or producing assessable income may make the final express excluding words no more than partly explanatory and partly definitive of what is excluded. In my opinion the section does not require a two-stage apportionment.

(1959) 101 C.L.R. 30. 2. (1971) 125 C.L.R. 494, at p. 498.

The third point concerns the mode of apportionment of the expenditure on mortgage interest. This is a matter which is primarily one of fact and is not one in which questions of principle can arise. However since it was raised by counsel for the Commissioner I think I should say that I agree with the views expressed by Yeldham J. that in a case like the present, if any adjustment must be made to the apportionment on the basis of floor area, then the proper measure is a comparison between the time during which the room was used for professional work and the time during which it was used for other purposes, and not between the time for which it was used for professional work on each day and twenty-four hours. There is nothing in the material before us to indicate the mode of calculation of the amounts allowed as deductions for electricity and house cleaning costs, but no complaint is made about those items by either party.

In my opinion the taxpayer's appeal should be allowed.

This case raises issues similar to those which the Court has dealt with in the recent case of Federal Commissioner of Taxation v. Forsyth. The appellant is a barrister who in addition to his city chambers maintains a study in his residence. He uses the study for the purposes of his professional practice for something like twenty hours a week for about forty-five weeks of the year. His total work commitment is eighty to one hundred hours a week. There was no physical separation of the study from the remainder of the house, it being adjacent to the living room. Its use for other than professional purposes was infrequent and intermittent. The taxpayer claimed to deduct pursuant to s. 51 of the Income Tax Assessment Act 1936 ("the Act") a proportion of the interest paid under a mortgage upon his home, and of municipal and water rates and of insurance premiums in respect of the premises. A Board of Review upheld the respondent Commissioner's assessment, whereupon the taxpayer appealed to the Supreme Court of New South Wales. Yeldham J. felt obliged to follow and apply the principles enunciated by Walsh J. in Thomas v. Federal Commissioner of Taxation [49] , Mason J. in Federal Commissioner of Taxation v. Faichney [50] and Helsham J. in Federal Commissioner of Taxation v. McCloy [51] , and dismiss the appeal. The taxpayer now appeals by special leave to this Court.

(1972) 46 A.L.J.R. 397; 3 A.T.R. 165; 72 A.T.C. 4094. 2. (1972) 129 C.L.R. 38. 3. [1975] 1 N.S.W.L.R. 202.

In my opinion, the appeal cannot succeed. The room used as a study does not cease to be part of the taxpayer's home merely because as a matter of convenience he uses it for professional purposes for twenty hours per week during forty-five weeks of the year. It is true that in choosing for purchase in 1969 this particular residence as a home for himself and his family the taxpayer was influenced by the fact that there was in it a room which he considered to be suitable for use by him as a study. But it remained essentially part of his home. The payments for mortgage interest, rates and insurance premiums were of a kind which in the circumstances of this case cannot be apportioned between home and office expenses. They related to the building and/or land as a whole, and are not affected in any way at all by reason of the fact that the taxpayer performs professional work on the premises. They would remain the same whether or not he worked at home.

In view of the foregoing considerations, and for the reasons I have given in Forsyth [52] , I conclude that no part of the outgoings possess the requisite character of outgoings incurred in gaining or producing assessable income, nor are they necessarily incurred in carrying on the taxpayer's profession. In any event, I believe that they must be regarded as outgoings of a capital, private or domestic nature, thus coming within the exception to s. 51.

High Court of Australia Stephen, Mason, Murphy, Aickin and Wilson JJ. Handley v Commissioner of Taxation (Cth) [1981] HCA 16

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