Lunney v Commissioner of Taxation

[23]

The provisions of "Schedule E r. 9" (8 & 9 Geo. 5 c. 40) are very different from s. 51 (1). The decisions on the former do not assist in deciding the present problem. The Court did not have recourse to those decisions when explaining the operation of s. 51 (1) in the case of Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [4] . With the comment made by the Court that the distinctive words of s. 51 (1) "have a very wide operation" [5] there ought to be noticed the observation made by Lord Blanesburgh in Ricketts v. Colquhoun [6] on r. 9: "Undoubtedly its most striking characteristic is its jealously restricted phraseology, some of it repeated to heighten the effect" [7] . Vaisey J. spoke to the same effect in Lomax v. Newton [8] . I think that the view which Warrington L.J. took of the scheme of r. 9 in his dissenting judgment in Ricketts v. Colquhoun [9] approximates to the meaning of the provisions of s. 51 (1), whereas the same thing could not possibly be true of the explanation made by Lord Blanesburgh. Warrington L.J. said in reference to r. 9: "Now I think, and I understand on this the Attorney-General agrees, that the words "necessarily" and "necessary" in the rule do not mean necessary and necessarily in the abstract, but that they mean necessary in regard to the circumstances of the individual concerned, the holder of the office, and in regard to the ordinary usages of mankind at this time in the history of the world. If that is so, and if he is unable to enter upon the performance of his duties without incurring, under the circumstances in which he is properly situated, the expense of travelling from his home to the borough, and if in the same way there is cast upon him, in order efficiently to perform his duties, extra expense by going to a hotel in Portsmouth, it seems to me that those are expenses incurred in the performance of his duties. He cannot perform his duty without incurring them, and in principle I cannot see the difference between an expense incurred while he is actually performing his duties, and one incurred for the purpose of enabling him to perform his duties" [1] .

[27]

Holroyd J. said in the case In re The Income Tax Acts [4] : "I may say I do not understand the difference between the going and the returning in such cases. If he goes to Melbourne, he comes back to where he lives; and in my opinion the expenses of going and returning are both necessary for the purpose of earning the money. I do not suppose that it is expected that, when a man goes up to Melbourne to earn money, he should remain there; that he is never to go back to his residence; that he is to be permanently there because he earns a few pounds as a director there" [1] . In that case, as in Federal Commissioner of Taxation v. Green [2] the taxpayer carried on business at his residence. In the present case the taxpayer did not. That is the fine distinction on which the present case turns. Conceding even that the travelling expenses in question were incurred by the taxpayer in gaining or producing the income from his employment, it is said against him that they are not allowable deductions because they are expenses "of a private or domestic nature." This argument is founded entirely upon the circumstances that the expenses were the cost of travelling from the taxpayer's home and returning to it. It disregards the importance of the purpose of the travelling. The point which is in dispute is similar to that which a'Beckett J. reserved in the abovementioned Victorian case. He said: "I am not saying what the difference would be if he were a mere suburban resident coming and going from the place where he resided, and which he occupied without any reference to his carrying on business there". [3] Why should expenses of travelling between home and a place where assessable income is earned be "private" or "domestic", if no business is carried on at home, but allowable as a deduction if some business is carried on at the place which is the taxpayer's home and it does not cease to be his home? a'Beckett J. took as a point of distinction that in the latter case the taxpayer's "presence is requisite for the purpose of his carrying on of the businesses from which his taxable income is produced" [3] . In regard to the same point Mr. R. R. Gibson said in case No. 27 [4] : "Where the assessable income is produced or earned by activities carried on by the taxpayer in several places the taxpayer's expenses of travelling from any one to any other of those places for the purpose of engaging in those activities are surely just as much incurred in gaining the assessable income as, and no more of a private nature than, are the expenses directly arising out of those activities. And, in my opinion, it does not matter whether the activities in any of those places do or do not amount to the carrying on of a business: if the taxpayer were a director of two companies carrying on business in different States, or if he were an employee in one place and the proprietor of a business in another, it would still be prima facie necessary for him to go from one State or place to the other for the purpose of gaining or producing his assessable income. Nor, in my opinion, would it be a material circumstance that the taxpayer was living at one of several places in which he was carrying on income-producing activities. In normal circumstances it would be advantageous to the gaining or producing of his assessable income for such a taxpayer to live at one of those places, one obvious advantage being that he would save the expenses, which he would have otherwise incurred, of travelling between his home and that place. This leads me to the view that if a taxpayer lives at a place where his presence is required from time to time for the purpose of engaging in income-producing activities, his expenses of travelling between that and any other place where his presence is required for similar purposes not only are incurred in gaining or producing his income but also should not be held to be of a private nature merely because it suits his private convenience to live where he does or even because the selected place of residence is, for private purposes, the most suitable of the several places at which he carries on income-producing activities" [1] . However, in that case, Mr. Gibson dissented. It appears that he relied on the Victorian case cited above. But the majority of the board, Mr. J. P. Hannan and Mr. E. F. Hamilton, thought that having regard to the decision of the majority in Ricketts v. Colquhoun [2] the right view to take of the expenses allowed as deductions in the Victorian case was that they were "private" or "personal" outgoings.

[31]

The view that the expenses of travelling from home to employment are "of a private or domestic nature" goes back to Cook v. Knott [5] which was decided in 1887. Hawkins J. said in that case: "I cannot see any difference in this case and the case of a man having an office in London, who chooses for his own convenience or pleasure or domestic necessity, as the case may be, to live and occupy a house at Brighton, and pay his ticket up to town every day. It was never contemplated that they should be called expenses necessarily incurred in the transaction of his business. I do not see if he is staying 300 miles off, and comes up specially to attend to his duties once a week, why he should not charge that, if his contention be correct" [1] These remarks have no relevance to the modern usage of residing in a suburb and working in the city or in another suburb. In Ricketts v. Colquhoun [2] all that was said in reference to Cook v. Knott [3] was an observation by the Lord Chancellor that it had stood for thirty-eight years and the rule on which it was decided had been re-enacted. Lord Blanesburgh said regarding the expenses in question in Ricketts v. Colquhoun [2] : "Rather are they expenses incurred by him" (the taxpayer) "because, for his own purposes, he chose to live in London; in other words they are purely personal to himself" [4] . It is a mistake to regard this as a reaffirmation of what Hawkins J. said in Cook v. Knott [3] . I think that the explanation which Mr. R. R. Gibson gave in case No. 27 [5] of Lord Blanesburgh's observation is correct. It is important to quote what Mr. Gibson said. "In that case (Ricketts v. Colquhoun [2] ) it was held that the appellant's expenses of travelling from London, where he was practising as a barrister and residing, to Portsmouth in order to attend to his duties as Recorder of Portsmouth, and of afterwards travelling back to London, were not incurred in the performance of his duties as Recorder and were therefore not deductible. The opinion was not expressed that the travelling expenses were of a private nature. I think it would be wrong to read that opinion into Lord Blanesburgh's remark [4] that "the expenses were incurred by him" (the appellant) "because for his own purposes, he chose to live in London: in other words they are purely personal to himself". If this remark is read with its context (I refer to the reasoning which ends with the statement that the appellant "was under no obligation to continue so to practise while holding his office") it will be seen that what his Lordship meant was that the expenses were purely personal to the appellant because, for his own purposes, he chose to practise in London where he lived: they were personal in the sense that his practice was personal" [6] .

[35]

Narraweena is according to the facts a residential suburb with a working population most of whom are employed in the city. When, as under modern conditions, homes are not generally available to employees near their employment it is, in my opinion, wrong to presume that an employee who resides in an ordinary residential suburb is actuated by some reason such as Hawkins J. mentioned. The truth is rather that the employee is concerned with having a place of abode, which necessarily becomes the base from which he goes and to which he returns in the course of earning his livelihood. It is not a correct construction of the situation in which he is placed to say that he lives there to get far away from his employment, because, if he is unable to reside near it, he needs to reside somewhere from which it is possible to get to his employment. The less time he spends travelling to and from his employment the more he is pleased. I do not take the view that the expense of such travelling belongs necessarily to the sphere of private or domestic expenditure. It is rather business expenditure chargeable to the earnings of the employment - his earnings - to and from which the taxpayer goes and comes. The expenditure does not provide for any private or domestic need. The expenditure is not in the category of ordinary living expenses. Its purpose is rather to earn income to meet such expenses. I do not take the view that the result of s. 51 (1) is that the expenses of travelling between a home and employment may not be private or domestic expenditure because a feature of the home is a room where the taxpayer earns other assessable income, whereas similar travelling expenses of a taxpayer who derives all his assessable income from the employment to and from which he travels are of an essentially different nature and cannot be regarded as incurred in gaining or producing the assessable income, but as expenses of a private or domestic nature, even though the latter taxpayer resides within a reasonable distance of his employment, or not so far away that it could not be expected that normally a person in his circumstances would live where he resides. The fact that the expenses in the case of either taxpayer are incurred solely and necessarily for the purpose of travelling to the taxpayer's employment may in all the circumstances of the case be sufficient to justify the conclusion that such expenses are incurred in gaining the taxpayer's income and are not "of a private or domestic nature". In this case that conclusion is in my opinion amply justified by the facts which are set out in the stated case.

[42]

For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as "incidental or relevant" to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of s. 51 in Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1] , it was said: "The expression "in gaining or producing" has the force of "in the course of gaining or producing" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself" [2] . In dealing with the same section in W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation [3] it was said that "it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income" [1] . The same expression was again used in Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [2] when it became necessary to solve a problem arising under s. 51. In that case it was said that "For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end" [3] . This passage was repeated in Charles Moore and Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation [4] . Examination of these cases, however, readily shows that the expression "incidental and relevant" was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [2] the passage quoted above [3] was immediately followed by the observation "The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income" [5] . Thereafter, it was said: "In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income" [6] . 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. In each of the cases except the last the expenditure in question was essentially expenditure of a business character but the question was whether it was expenditure "incurred in gaining or producing the assessable income" or necessarily "incurred in carrying on a business for the purpose of gaining or producing such income" whilst in the last-mentioned case the occasion of the loss in question was properly regarded as an "incident" of the carrying on of the business which produced the taxpayer's assessable income.

[47]

The problem now before us was to some extent the subject of consideration in the recent case of Newsom v. Robertson [1] where, pursuant to the Income Tax Assessment Act 1918 Imp., the question was whether railway fares which had been paid by a professional man in respect of journeys between his home and his professional chambers constituted "money wholly and exclusively laid out or expended for the purposes of his profession". It should be mentioned that in this case the additional fact appeared that the taxpayer consistently performed some of his professional duties at his home and the case was put as one in which the facts disclosed that the expenditure was incurred, not merely in travelling between his home and place of business, but, rather, in travelling between one place of business and another. Yet the taxpayer's claim to a deduction was rejected both in the first instance and in the Court of Appeal. None of the members of the latter court were prepared to assent to the proposition that the taxpayer's journeys were for the "purpose" of his profession; in the language of Romer L.J. "The object of the journeys, both morning and evening, is not to enable a man to do his work but to live away from it" [2] . The fact that few taxpayers are free to choose whether they will live at their place of work or away from it may appear to invest this statement with a degree of artificiality. But, even in these modern times, they still have, within limits, the right to choose where their homes shall be so that a taxpayer's daily journeys between his home and place of work are rendered necessary as much by his choice of a locality for his residence as by his choice of employment or occupation. And indeed the purpose of such journeys is, at least, as much to enable him to reside at his home as to attend his place of work or business. In the course of seeking to ascertain the "purpose" of such daily journeys, Denning L.J. in Newsom's Case [1] made some obvious, but nevertheless interesting, observations on this point. He said: "In the days when income tax was introduced, nearly 150 years ago, most people lived and worked in the same place. The tradesman lived over the shop, the doctor over the surgery, and the barrister over his chambers, or, at any rate, close enough to walk to them or ride on his horse to them. There were no travelling expenses of getting to the place of work. Later, as means of transport quickened, those who could afford it began to live at a distance from their work and to travel each day by railway into and out of London. So long as people had a choice in the matter - whether to live over their work or not - those who chose to live out of London did so for the purposes of their home life, because they preferred living in the country to living in London. The cost of travelling to and fro was then obviously not incurred for the purpose of their trade or profession. Nowadays many people have only a very limited choice as to where they shall live. Business men and professional men cannot live over their work, even if they would like to do so. A few may do so, but once those few have occupied the limited accommodation available in Central London, there is no room for the thousands that are left. They must live outside, at distances varying from three miles to 50 miles from London. They have to live where they can find a house. Once they have found it, they must stay there and go to and from it, to their work. They simply cannot go and live over their work. What is the position of people so placed? Are their travelling expenses incurred wholly and exclusively for the purposes of the trade, profession or occupation? I think not. A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not. It is a living expense as distinct from a business expense" [1] .

[49]

In the course of the argument we were referred to a number of cases in which, from time to time, much the same problem has been discussed. It is unnecessary to review these cases but of them we mention Cook v. Knott [1] ; Friedson v. Glyn-Thomas [2] ; Ricketts v. Colquhoun [3] ; Nolder v. Walters [4] ; Blackwell v. Mills [5] , and Durbidge v. Sanderson [6] . No doubt the legislative provisions which required consideration in these cases were not identical with s. 51, but the process of reasoning by which they were decided consistently rejects the notion that expenditure incurred by a taxpayer in order to travel from his home to his place of business is, in any sense, a business expenditure or an expenditure incurred in, or, in the course of, earning assessable income. Indeed they go further and refuse assent to the proposition that such expenditure is, in any relevant sense, incurred for the purpose of earning assessable income and unanimously accept the view that it is properly characterised as a personal or living expense. This view agrees with that which we, ourselves, entertain. Expenditure of this character is not by any process of reasoning a business expense; indeed, it possesses no attribute whatever capable of giving it the colour of a business expense. Nor can it be said to be incurred in gaining or producing a taxpayer's assessable income or incurred in carrying on a business for the purpose of gaining or producing his income; at the most, it may be said to be a necessary consequence of living in one place and working in another. And even if it were possible - and we think it is not - to say that its essential purpose is to enable a taxpayer to derive his assessable income there would still be no warrant for saying, in the language of s. 51, that it was "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". The questions in the cases stated should be answered in the negative.

Lunney v Commissioner of Taxation - [1958] HCA 5 - HCA 1958 case summary — Zoe

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Judgment (50 paragraphs)

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