Christopher Jones and Commissioner of Taxation
[2014] AATA 821
•15 October 2014
[2014] AATA 821
Division GENERAL ADMINISTRATIVE DIVISION File Number
2014/0419
Re
Christopher Jones
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member Bernard J McCabe
Date 15 October 2014 Date of written reasons 31 October 2014 Place Brisbane The Tribunal affirms the decision under review for the reasons given orally at the hearing and transcribed.
............................[Sgd]............................................
Senior Member Bernard J McCabe
CATCHWORDS
PRACTICE & PROCEDURE – Taxation – Objection decision – Teacher – Alleged education related expenditure – CDs and DVDs for personal use not deductible – Items essentially private or domestic expenditures not deductible – Distributing resources for purposes of education deductible – Costs of acquiring or developing teaching aids deductible – Link between expenditure and income producing activity cannot be too remote – Necessary to characterise expenditure and determine existence of nexus – Claim for the work-related vehicle expenses rejected – Claim for home office expenses rejected – Decision affirmed.
LEGISLATION
Administrative Appeals Tribunal Act 1979 (Cth), s 42
Income Tax Assessment Act 1997 (Cth), ss 8.1, 35.10, Division 28
Taxation Administration Act 1953 (Cth), ss 14ZZK
CASES
Federal Commission of Taxation v Finn (1961) 106 CLR 60
REASONS FOR DECISION
Senior Member Bernard J McCabe
31 October 2014
INTRODUCTION
A decision in these proceedings was delivered orally together with reasons at the conclusion of a resumed hearing. The taxpayer subsequently requested written reasons be supplied. These written reasons are based on the transcript of the hearing.
The objection decision in this case relates to the assessment of the applicant's income for the income year ended 30 June 2011. During the course of that year the applicant worked as a relief teacher on a mostly casual basis at five primary schools. (I think there were two days spent at a high school.) He derived a salary of $43,295 in that process. He also worked as a casual tutor at a photography school where he derived a salary of $2,530 and also as an extra working in movie and commercial production where he made a small amount of money. He also claims to have made a loss on a photography business that he established. The taxpayer claimed deductions in the amount of $42,112 in respect of these various expenses and outgoings. The Commissioner conducted an audit and disallowed all but $8,470 in outgoings. The taxpayer has now asked the Administrative Appeals Tribunal to reconsider the objection decision.
Section 14ZZK(a) Taxation Administration Act 1953 (Cth)
The taxpayer did not object to the penalties that were imposed by the Commissioner. At the beginning of the hearing he sought leave to extend the grounds of objection under
s 14ZZK(a) of the Taxation Administration Act 1953 (Cth). I will deal with this question first. The Commissioner says I should not, indeed, I cannot give leave. I certainly agree I should not, as the Commissioner did not have a proper opportunity to turn his mind to the question and prepare material to ask questions at the hearing, and what is more, I note the taxpayer did not really offer any evidence in relation to that issue in any event. If the taxpayer wishes to object, the appropriate course is for him to approach the Commissioner and request an extension of time to lodge an objection. I think the Commissioner's more fundamental objection is right in any event; the penalties decision is a completely separate decision. One cannot extend the grounds of objection to one decision to include a completely different decision. So leave to extend the grounds to deal with the penalties question is not granted; that needs to be dealt with through a separate process.
Section 14ZZK(b) Taxation Administration Act 1953 (Cth)
I turn then to the claims that have been made for deductions in relation to work-related expenses, and outgoings and losses. The law is contained in two statutes in particular. The first provision of importance is s 14ZZK(b) of the Taxation Administration Act 1953 (Cth). It requires that the taxpayer do two things in the course of this process: he must demonstrate to my satisfaction the Commissioner's assessment is incorrect, and he must demonstrate what the correct or more nearly correct assessment should be. It is not enough to simply prove the Commissioner is wrong.
Section 8.1 Income Tax Assessment Act of 1991 (Cth)
The second provision of relevance here - indeed of central relevance - is s 8.1 of the Income Tax Assessment Act of 1997 (Cth) which says you can deduct from your assessable income any loss or outgoing to the extent it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Now, with the partial exception of the photography business, what we are talking about here is ss 8.1(1)(a). We are talking about whether expenditures were incurred in gaining or producing assessable income. I also note the Commissioner has referred to ss 8.1(2), which says there are a number of things that are not deductible as outgoings, including, for example, losses or outgoings of a private or domestic nature. The Commissioner says that is a relevant consideration in this case because at the end of the day this section requires the taxpayer to establish a nexus or link between the expenditures or outgoings and the income earning activities. That involves a characterisation process.
Expenditures and Outgoings
The taxpayer has claimed deduction in respect of an extensive list of expenditures and outgoings. Many relate to his teaching work. I am going to refer to a number of them by categories rather than dealing with each item of expenditure on each occasion, as that would be impractical and unnecessary. In order to assess whether expenditure is properly characterised as being related to one's work that generates income or whether it is in fact something else, one must first have a clear idea of what that work entails.
The taxpayer was a relief teacher who taught a range of subjects at primary and secondary level, though most of his work during the year of income was in primary schools. He also tutored adults at a photography school and did a limited amount of work as a casual extra in film and television production.
Dealing firstly with the education work, letters from the various principals and supervisors establish the taxpayer was not required to prepare extensive lesson plans or provide resources in the course of his teaching work. The essentials were generally provided and the lesson plans were almost always already in place. However, anyone who knows anything about teaching understands that teaching - and good teaching in particular - is about more than standing in front of a class and delivering the content referred to in a lesson plan. To be effective a teacher must engage with the students, and that can be done in a variety of ways and might legitimately involve the use of a variety of techniques, aids and resources. It is not the Commissioner's place to dictate how the teacher does his or her job. Some of the methods of engagement might be unusual or even idiosyncratic. Innovation often has that quality, and the tax system should not discourage innovation. The test, therefore, is not whether aids or resources are conventional or commonly employed; the question, rather, is whether the taxpayer can establish a sufficient nexus between the expenditure and the income producing activity. If the nexus or link is too tenuous or remote, the deduction will not be allowed.
I should add it is necessary for each taxpayer to demonstrate the nexus in each case. Absent special provision by the law, one is not entitled to claim a deduction for a particular expenditure just because, for example, lots of teachers do it. A teacher cannot claim a deduction for the cost of a popular teaching aid that is commonly used in class by other teachers if that teacher does not also acquire and use that aid in connection with deriving income as a teacher. The taxpayer may be able to claim the cost of generating, copying or acquiring materials that he actually used in his class, provided the materials were generated, copied or acquired for that purpose. To the extent he paid for and used clips from DVDs or tracks from CDs in his class or handed out copies of newspaper articles or referred to newspaper stories in his teaching, the expenditures incurred on those items may be deductible assuming the expenditure was incurred for the purpose of using the material in class. If the material was already at hand and he just happened to make use of it, then it does not by that fact become transformed into a deductible expenditure.
CDs and DVDs
The taxpayer in this case has made claims for a number of DVDs and CDs that were never used in class, and it is unclear if that was his purpose when he acquired any of them in any event. Indeed, some of the DVDs could not be used given their rating and the age of the children he was teaching. I am satisfied that most of these resources were really acquired for personal or domestic use, even if some of them found their way into the classroom. At any rate the evidence does not displace that assumption, which is inherent in the Commissioner's objection decision.
Distribution of Resources
Similarly, to the extent he incurred costs in copying and distributing resources in the form of hand-outs provided to students that were copied and generated for that purpose, those costs would be deductible. The cost of acquiring or developing teaching aids for use in class, and that were required for that purpose (eg, puppets, wigs, costumes or musical instruments) may also be deductible. But the amounts claimed with respect to these expenditures are not great. It is also unclear from the evidence how books and magazines and newspapers related in a more general way to the taxpayer's income earning activities, apart from those that were actually used to hand out. The taxpayer's evidence on this and other issues at the hearing was difficult to interpret. It was discursive and vague. It is possible these expenditures could be related to income producing activities: I would not want it to be said acquiring a newspaper or a magazine or a book cannot be related to teaching. But the evidence as it stands in this case does not demonstrate the Commissioner's scepticism about the absence of a clear nexus between the expenditure and the income producing activity was misplaced.
Movies and Plays
I do not accept the cost of attending movies or plays that were not directly referable to his teaching, for example in the course of a class excursion or for reviewing material that is being taught in class, or for that matter acting activities, can be deducted. Those excursions were undoubtedly of general interest to Mr Jones in light of his teaching and acting, and at some general level that may have made him a better actor or teacher of, for example, drama or English or history. But the link between the expenditure and the income producing activity cannot be too remote. A teacher cannot seek a deduction for buying a copy of ‘To Sir, with Love’ or ‘Goodbye, Mr Chips’ on the basis he might be inspired to teach better or obtain insight on how to handle difficult students, or learn about camera angles and lighting, any more than a lawyer can get a deduction for the cost of buying ‘Rumpole of the Bailey’ or buying a box set of ‘Law & Order’ DVDs.
Camera Expenses and Photography
The cost of camera equipment or editing software that might have incidentally been used to take or develop photos at school functions is not deductible, even if those things are of value to the school and contribute in some general way to the taxpayer's attractiveness to a particular school. I have the impression from the evidence that they are still essentially private or domestic expenditures, which includes expenditures on a hobby. The same can be said of the taxpayer's extracurricular activities like teaching futsal or other sporting activities if they were part of a personal preference, or for family reasons, or purely intended for networking purposes. I note the taxpayer's daughter was a member of one team he coached. The fact that there might have been some incidental benefit in terms of greater profile which led to more job opportunities is not enough to change what I take to be the essential character of these expenditures, which was private or domestic.
There was a good deal of evidence given at the hearing about the cost of a trip the taxpayer undertook along the Great Ocean Road in Victoria. He took a number of photographs that he subsequently used in his photography classes. He spoke of an expectation on the part of the college that employed him that he demonstrate authority and expertise in the subject matter by reference to a body of work. Mr O'Brien for the applicant said the tour, which occurred over several days and included the taxpayer's mother, was effectively an exercise in self-discovery, much like the tour of architectural features in the case of Finn.[1] Mr O'Brien said it was also intended to generate quality raw material for use in classes. I accept that is plausible.
[1] Federal Commission of Taxation v Finn (1961) 106 CLR 60.
The Commissioner had a different take on the taxpayer's trip. He suggested it was actually a holiday, albeit that it featured a good deal of photography, but that was because the taxpayer was undertaking the hobby of photography. The Commissioner says the taxpayer may have used the raw material he generated in classes, but the evidence does not establish that was why he incurred the expenditure to undertake the activity. I accept, after reviewing all the evidence, that the applicant may indeed have been engaged in a process of self-discovery, but his evidence does not persuade me that his purpose was to produce raw material for use in class or to engage in any other income producing activity. It may have been incidental to his purpose, but I do not think he has produced sufficient evidence to persuade me that this journey undertaken with his mother to a popular tourist destination was more than what it appears: he was engaged in a hobby during the course of a vacation that had, at best, an incidental effect or incidental purpose.
Travel
The same observations apply in relation to the taxpayer's claims arising out of a futsal trip to the United Kingdom. Most of his expenses on this trip were paid, but he did incur some costs, including the cost of visiting popular tourist destinations like historical monuments. Visiting historical sites is undoubtedly interesting, and of some general benefit, to a teacher of history but it is still necessary to characterise the expenditure and determine whether there is a nexus. In the circumstances, the taxpayer's evidence does not persuade me the expenditure was incurred in gaining or producing assessable income. It was of general interest to him.
Work-related Car Expenses
My conclusions in relation to these issues effectively dictate my conclusions in relation to the work-related car expenses claimed. The taxpayer says he used his car and incurred expenses in doing so when travelling to and from various places of work, and other work-related activities, like futsal games and the movies. He claimed 92 per cent of the vehicle's usage during the period under review was work-related. Mr O'Brien conceded in the course of his submissions there were problems with substantiating some of the trips referred to in the logbook. He suggested this aspect of the dispute should be remitted to the Commissioner pursuant to s 42(d) of the Administrative Appeals Tribunal Act 1979 (Cth) for the purposes of recalculating the entitlement, and agreed the true entitlement was somewhat less than 92 per cent of total usage. I am afraid it is inappropriate to remit the matter at this point. There has been ample opportunity for the issues in relation to logbook entries to be explored and corrected. I think the claim falls to be considered on the basis it was presented. That is where we run into problems.
The Commissioner pointed out Division 28 of the Income Tax Assessment Act of 1997 (Cth) establishes a set of rules that regulate claims for work-related motor vehicle expenses. The taxpayer is required to use one of four statutory methods for the purposes of calculating expenses. If he does not use one of those methods or does not use them correctly, and as a consequence the method selected is not a reliable indicator of those expenses, he cannot make the claim. The taxpayer in this case used the logbook method. The logbook had to be maintained over a three month period. One of the requirements is that an odometer reading must be properly recorded, and there is evidence that they have not been recorded in accordance with the law.
But even if I ignore that issue, there is a larger issue arising out of the fact I found that many of the activities to which the taxpayer travelled were not, in fact, work related. I also doubt whether he needed his vehicle to carry his various aids and resources. I asked him at the hearing about what he carried to teaching jobs. He talked of a backpack and a guitar, but did not describe a load that could not be carried on ordinary public transport. The effect of all those findings is to call into question the very integrity of the records. The logbook does not accurately reflect what he is entitled to claim. In the circumstances it should be discarded, which means the claim for the work-related vehicle expenses has to be rejected.
Home Office Expenses
I turn now to the claims in respect of home office expenses, which form a substantial part of the overall claim. Mr O'Brien suggests this claim should also be remitted to the Commissioner so a more reasonable claim can be ascertained, but I think the time for those discussions has long passed. But more to the point, it would be pointless in any event for this reason: even if I accept the taxpayer needed a dedicated space to store his chattels and prepare his lesson plans (and I am inclined to think he did have that need given he did not have a permanent place of work and clearly put a lot of thought into his teaching activities), the evidence does not establish he did actually have such a dedicated space within his home. It appears he worked all over the residence and used most of the spaces in his home for every aspect of his life. That claim must therefore be rejected in its entirety.
CONCLUSION
I will deal briefly with the claim for losses of outgoings in connection with the taxpayer's photography business. There was limited evidence on the question of whether or not the taxpayer was actually carrying on a business. He certainly made little enough out of the enterprise, if that is what it was. I am aware of a website and business cards and a few jobs where the applicant was paid for taking photographs. I am not satisfied there is sufficient evidence of the kind of system and regularity that characterise a business during the year of income. I am satisfied it was still more in the nature of a hobby which was occasionally monetised. But there is another, more fundamental reason for excluding the claim which makes in unnecessary to consider system and regularity. The Commissioner points out this was a non-commercial business activity, the cost of which is excluded by reason of s 35.10 of the Income Tax Assessment Act of 1997 (Cth). I accept the evidence about this business, limited as it is, does not establish any of the exceptions apply and the description of net losses to be deducted against income from other sources has not been exercised.
DECISION
In conclusion then, the taxpayer has failed to demonstrate the Commissioner's assessment was wrong and he certainly failed to demonstrate what the correct assessment should be. In those circumstances, the objection decision must stand.
I certify that the preceding 22 (twenty - two) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe .............................[Sgd]...........................................
Associate
Dated 31 October 2014
Date of hearing 15 October 2014 Advocate for the Applicant David O'Brien, David O'Brien Accountants Solicitors for the Respondent Stephen Munic, Commissioner of Taxation
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