Handley v Federal Commissioner of Taxation

[1981] HCA 16

HIGH COURT OF AUSTRALIA

Stephen, Mason, Murphy, Aickin and Wilson JJ.

HANDLEY v. FEDERAL COMMISSIONER OF TAXATION

(1981) 148 CLR 182

1 April 1981

Income Tax (Cth)

Income Tax (Cth)—Deductions—Outgoing incurred in gaining assessable income—Barrister—Study at home used for purposes of professional practice—Interest on moneys borrowed to purchase house—Rates—Fire insurance premium—Whether allowable deductions—Whether outgoings of a domestic nature—Income Tax Assessment Act 1936 (Cth),s. 51 (1).

Decisions

1981, April 1.
The following written judgments were delivered: -
STEPHEN J. Section 51 (1) of the Income Tax Assessment Act 1936, as amended, is the general provision which determines what losses and outgoings incurred by a taxpayer shall be allowable deductions. Because it must deal with items of expenditure of many and varied kinds it is expressed in very general terms. It has been said that its "language is simple enough and, in the main, little difficulty is encountered in recognizing those items of business expenditure which qualify as deductions" - Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478, at p 496 . (at p185)

2. However, perhaps because of the very simplicity of its language, difficulties have been encountered in cases involving what have been called home office expenses. Expenditures of this nature, associated with portion of taxpayers' dwellings used to a greater or lesser extent for business or professional purposes, have, when claimed as deductible, been variously treated and the principles involved and the distinctions drawn between various such expenditures have not always been immediately apparent. (at p185)

3. The expenditures claimed as deductible by the present taxpayer, a barrister, are in the nature of home office expenses. They concern a room in his home, regularly used by him as a study for some twenty hours a week for about forty-five weeks a year. The existence of this room, suitable for use as a study, was regarded by him as an essential feature affecting his decision to purchase the house. The room is only used infrequently for purposes other than as a study, but it does provide a means of access to a patio which the family use occasionally. The expenditures consist of interest on moneys borrowed on the security of a mortgage over the premises and applied in their purchase, municipal and water rates and fire insurance premiums, all in respect of the premises. In each case one fifteenth of the total expenditure has been claimed, that being the proportion of the floor area of the house which is occupied by the study. The Commissioner allowed claimed deductions in respect of electricity and house cleaning charges apportioned in respect of the study and no question arises as to them, but he disallowed these other claimed deductions. Their disallowance was upheld by a Board of Review. (at p185)

4. On appeal to the Supreme Court of New South Wales Yeldham J. referred to Lunney's Case and to Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397; 3 ATR 165; 72 ATC 4094 ; Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38 , Federal Commissioner of Taxation v. McCloy (1975) 1 NSWLR 202 and the decision of the Federal Court of Australia in Federal Commissioner of Taxation v. Forsyth (1980) 42 FLR 1; 29 ALR 528; 10 ATR 729; 80 ATC 4176 , now on appeal to this Court. It was in reliance upon McCloy, Thomas and Faichney that the Board had upheld the Commissioner's assessment. (at p186)

5. In view of the disallowance of deductions in the earlier cases his Honour found it difficult to find a logical justification for the allowance of expenditure in Forsyth's Case, with which decision he however expressed entire agreement. He nevertheless concluded that he should follow those earlier cases, adding that "plainly the matter is one which should be resolved at an appellate level". (at p186)

6. Section 51 (1) relies upon two sets of descriptions and upon the principle of apportionment to define those losses and outgoings which are to be deductible. It first describes a general class of losses and outgoings which are to be deductible and then goes on to describe certain specified sub-classes of expenditure which are to be excluded from the general class. In each of these descriptions it uses the phrase "to the extent to which", a phrase which calls for a process of apportionment whenever the facts require it. (at p186)

7. Apportionment is necessary in the case of the general class of deductible outgoings in at least two instances: when an item of expenditure has been applied to obtain things or services of which only "distinct and severable parts are devoted to gaining or producing assessable income" and also when the things or services obtained serve indifferently the object of gaining or producing assessable income and also some other unrelated object: Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47, at p 59 . It may also no doubt become necessary at the later stage of applying to a particular case the description of the excluded sub-classes. (at p186)

8. This principle of apportionment embodied in s. 51 (1) makes it clear that the mixed character of a loss or outgoing is in itself no bar to the deductibility of an appropriate portion of that loss or outgoing. Another principle important in the application of s. 51 (1) is that it is for the taxpayer and not the Commissioner to decide upon the manner and extent of expenditure incurred by the taxpayer in gaining his income: that outgoings are unwisely or excessively incurred is nothing to the point in determining whether or not they are allowable deductions. This was made clear in Ronpibon and was applied in Cecil Bros Pty. Ltd. v. Federal Commissioner of Taxation (1964) 111 CLR 430 in a passage subsequently adopted by their Lordships in Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. (1971) AC 760, at p 772 , where it was said that "a trader is entitled to conduct his business and to acquire his trading stock in his own way". This may become of particular relevance in the case of home office expenses: there will be no exclusion from deductibility merely because a taxpayer might more economically have conducted his business or profession exclusively from his principal place of business: if a taxpayer's expenses are to any extent incurred in gaining or producing assessable income, thus answering the description of the general class of deductible outgoings, and are not within any excluded sub-class they will be deductible regardless of their economic wisdom or expediency. (at p187)

9. It is in the context of these principles that the characterization of particular losses and outgoings which s. 51 (1) calls for is to be undertaken. That characterization will involve the analysis of particular losses or outgoings so as to determine first whether they are in whole or in part business expenditures (to adopt the shorthand phrase used in Lunney's Case (1958) 100 CLR, at p 496 and then, to the extent that they are, to determine whether any part of them nevertheless falls within an excluded sub-class. (at p187)

10. It is principally with the decisions in Thomas (1972) 46 ALJR 397; 3 ATR 165; 72 ATC at p 4094 and in Faichney (1972) 129 CLR, at p 38 that this appeal must be concerned. In Thomas a barrister had borrowed money to meet the cost of adding rooms to his house, one of which he used as a study. In denying him a deduction for any part of the interest on the borrowed money Walsh J. said (1972) 46 ALJR, at p 399; 3 ATR, at p 168; 72 ATC, at p 4097 that 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". Accordingly the interest incurred was of a capital, private or domestic nature and hence excluded from deductibility. It did not lose that character 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 had not spent money "in erecting premises suitable only for use as business premises. He added rooms to his house." (at p187)

11. In Faichney (1972) 129 CLR, at p 43 Mason J. said that a study in a home was a part of that 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". His Honour (1972) 129 CLR, at p 44 distinguished the case of a doctor's surgery integral with his home. He observed that "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 . . . ". (at p188)

12. As I read those judgments the above represents the substance of the reasoning which led in each case to disallowance of the claim to deduct interest. In Thomas the decision was squarely based upon the expenditure being of a capital, private or domestic nature; likewise in Faichney, save that Mason J. was at pains to point out that he was not thereby to be taken as assuming that the outgoing would in any event have fallen within the general class of business expenses. (at p188)

13. In each of these cases the use made by the taxpayer of the room in question was not regarded as the critical feature. Rather it seems to have been the physical character of that room, forming as it did an integral part of the taxpayer's home, which was regarded as decisive. However Mason J. would not regard mere physical unity as necessarily disqualifying, as was shown by his remarks concerning a doctor's surgery. With respect, this must clearly be correct: it cannot matter that the proprietor of a small suburban shop lives behind that shop in premises integral with it; the rent attributable to the shop will none the less surely be deductible. Nor can it matter to what degree the two parts intercommunicate; s. 51 (1) cannot be affected by vagaries of architecture or design. (at p188)

14. Wherein then lies the distinction between shop or surgery on the one hand and so-called home office on the other? It can scarcely reside in the fact that in addition to the home office the taxpayer maintains elsewhere another and principal place of business. A surgery will be none the less a surgery, properly regarded as a place of business, although the doctor conducts most of his practice at some central clinic or larger surgery distant from his home. A fruiterer is not to be denied deductions in respect of the suburban fruit shop behind which he lives because he also conducts a more substantial business at a lock-up fruit shop in some nearby shopping centre. (at p188)

15. Again, while it is true that to sell fruit or to attend to patients involves direct contact with the public, whereas a study may seldom if ever be entered by customers or clients, this distinction is surely irrelevant in the application of s. 51 (1). It only reflects the different character of work involved in different income-earning pursuits. Thus a caterer may prepare in the kitchen of his own home all the food which he supplies to meet orders and may derive a substantial income from his business but he will not be denied deductions because no customers visit his kitchen. (at p189)

16. Moreover, to take the same example, the fact that such a caterer uses one and the same kitchen both to prepare the food which he delivers to customers in the course of his business and to cook his own meals, while it may call for apportionment of outgoings, will not disqualify him from entitlement to a due proportion of those outgoings. Likewise with many small businesses (and local chiropodists, physiotherapists and the like come to mind) which, perhaps only after-hours or on week-ends, involve attending to customers in a room in the house which at other times may be used as an ordinary living room. These are occasions for apportionment, not for exclusion from deductibility. Incidentally, the foregoing examples suggest that the term "home office" may be a misnomer if thought of as describing some unique situation; there seems in fact little to differentiate a so-called home office from any other business use of a home, whether it be used conjointly with a principal place of business located elsewhere or as the sole place of business. (at p189)

17. I have thus far described, and in turn discarded, a variety of factors which might be thought to disqualify a taxpayer from deductions for home office expenses: the physical unity of the home with the office, the one being integral with the other; the existence of intercommunication between the two; the presence elsewhere of another and principal place of business; the absence of visits by clients or customers to the home office; its use in part for purely domestic purposes. It would no doubt be possible to conceive of others. (at p189)

18. The reason why none of these features provides a satisfactory criterion for the denial of deductibility is because the problem posed by s. 51 (1) is not of a kind to be answered by specific criteria such as these. The text of s. 51 (1) itself provides the only criterion of deductibility. Disregarding for the moment the exclusion of particular sub-classes, it is that there should exist a particular relationship between a loss or outgoing and the gaining or producing of the taxpayer's assessable income (I need here refer only to the first limb of the description of the general class of deductibility). That relationship must be such that the loss or outgoing is of a nature or character which is incidental and relevant to the gaining of assessable income and must have been incurred "in the course of gaining or producing" it. Whether or not on each occasion the loss or outgoing is sufficiently incidental or relevant will depend upon a variety of factors. In some circumstances the purpose for which the advantage occasioning the loss or outgoing is sought may evidence a sufficient relationship with the income-earning process, as for instance where interest is payable on borrowed money. On other occasions, the purpose may be of little assistance; it will be necessary to look to other factors to see what role, if any, the loss or outgoing plays in the conduct of the income-earning activities. As Dixon J. said in Amalgamated Zinc (de Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 CLR 295, at p 309 : "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 itself." See also the judgment of the Court in Charles Moore &Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation (1956) 95 CLR 344, at p 351 . (at p190)

19. In the present case, the advantage sought to be obtained by the outgoing can only be enjoyed by use: whether or not there exists a sufficient relationship between this outgoing and the income-earning activities of the taxpayer is therefore best determined by looking to the use to which the home study was put. If on examination more than one use is disclosed, it will mean only that this is a case for apportionment. There is, in this regard, no conflict between this examination of use and the determination of essential character referred to in Lunney (1958) 100 CLR, at p 497 : the effect of an analysis of relevant factors, in this case primarily of use, is to determine whether the "essential character" of a deductible sum is that of business expenditure. (at p190)

20. In the present case it requires no close analysis to discern an intimate relationship between each of the present taxpayer's claimed outgoings and his earning of assessable income. It is not and could not be disputed that what he does by way of use of his study is directly concerned with the earning of his income. That part of the interest which he pays which is apportionable to the study provides him with the surroundings which he needs in which to carry on part of his income-earning activities. The rates and fire insurance premiums which he pays are, to the extent that they may be apportioned to the study, no less referable to his income-earning activities. (at p190)

21. It follows that I regard an appropriately apportioned part of each of these expenditures as falling within the general class of deductible losses and outgoings described in s. 51 (1). If the decisions in Thomas (1972) 46 ALJR 397; 3 ATR 165; 72 ATC, 4094 or in Faichney (1972) 129 CLR, at p 38 are to be regarded as leading to the contrary conclusion I would with respect decline to follow them. Their reliance upon criteria concerned with the location of the home office, intergral with the taxpayer's home, and their disregard of the use to which a home office is put appears to me to find no support in the terms of s. 51 (1). (at p191)

22. There remains the effect of that part of s. 51 (1) which excludes from deductibility that sub-class of losses or outgoings which are of a "private or domestic nature". In both Thomas and Faichney this was the express ground of decision. So far as I am aware there has been no close examination of this exclusion by any court. However the difficulty of assigning to it any subject matter upon which to operate, expressed as it is as excluding losses and outgoings otherwise falling within the general class of allowable deductions, has been adverted to in the cases. In Faichney Mason J. (1972) 129 CLR, at p 44 observed that such examples of private or domestic expenditure as leapt to the mind were such as "could not conceivably be incurred in gaining assessable income". In Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494, at p 498 Menzies J. said that "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". I not only conclude that the present taxpayer's apportioned outgoings are within the category of outgoings incurred in gaining his assessable income; I also regard them, in the circumstances of this case, as by their nature excluded from the category of private or domestic outgoings. Adopting the analysis which I have and discarding as insignificant matters such as the integral nature of the study and the home, nothign remains as a feature of duly apportioned parts of these outgoings which would at all answer the description of expenditure of a private or domestic nature. (at p191)

23. If this conclusion would seem substantially to deprive of effective operation the sub-class of private or domestic expenditure as an exception to the general class of deductible expenditure, this may not be as surprising as it seems at first sight. Another sub-class mentioned in s. 51 (1), that related to expenditure incurred in gaining exempt income, has plainly enough no effective operation as an exception to the general class. In Ronpibon (1949) 78 CLR, at p 56 the Court pointed out that "exempt income can never be assessable income. They are mutually exclusive categories". The explanation there given by the Court for this specific exclusion was the legislation's "desire to declare expressly that so much of the losses and outgoings as might be referable to exempt income should not be deductible from the assessable income". While admittedly illogical to express such a declaration in the form of an exemption, it was said to serve "the not unimportant purpose of making an express contrast". The same explanation may apply to the presence in s. 51 (1) of the exclusion of expenditure of a private or domestic nature. Even if this be not so, and Boards of Review have on occasions discerned instances where this exclusion may operate as a true exception, I am, for the reasons earlier stated, satisfied tha it does not operate to except the present home office outgoings. (at p192)

24. It remains only to say something of Lunney (1958) 100 CLR, at p 478 and of the concept of a base of operations which was there referred to and which was relied on by the respondent. Lunney was concerned exclusively with the question of whether the expense of travelling between home and place of work was an allowable deduction. This is a question to which the traditional answer given, that it is not, is said to owe its origin to social conditions of over one hundred and fifty years ago. This is explained in the dissenting judgment of McTiernan J. in Lunney (1958) 100 CLR, at pp 492-493 and by Denning L.J. in Newsom v. Robertson (1953) 1 Ch 7, at pp 15-16 . As Dixon C.J. said in Lunney (1958) 100 CLR, at p 486 , bare reason must lead to misgivings about disallowing such outgoings, but, the principle having been settled long ago, it was, he thought, for the legislature and not the Courts to alter it. Williams, Kitto and Taylor JJ., in their joint judgment, were in no doubt but that such expenses of travel were not "by any process of reasoning a business expense" (1958) 100 CLR, at p 501 . They had earlier said (1958) 100 CLR, at p 499 that the purpose of such journeys was at least as much to enable the taxpayer to reside at his home as to attend his place of work and in that connexion they cited a lengthy passage from the judgment of Denning L.J. in Newsom's Case. His Lordship there refers to the notion of the geographic base of a taxpayer's trading operation. For a barrister this is said to be his chambers, not his home; so too the expense of travel to chambers is incurred because he lives at a distance from his base and is incurred for the purpose of living in that fashion and not for the purpose of his profession. (at p192)

25. What was said in the joint judgment in Lunney was, of course, directed exclusively to the single question before the Court, relating to the expense of travelling to work. If, despite the careful reasoning in the dissenting judgment of McTiernan J. and the misgivings expressed by Dixon J., the disallowance of such travelling expenses can be justified in modern conditions as a matter of logic, rather than as a question of adherence to well settled authority, the logic applicable to this quite special context cannot, I think, be applied in other areas. In particular, it cannot be applied to the quite different case of home office expenses, as was sought to be done by the respondent, regarding those expenses as incurred for the purpose of living at home and hence as domestic or private in nature. Apart from the inappropriateness of such a transfer of reasoning from one area to another, such a transfer may in many cases be found to result in conflict with the principle that it is "not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent" - Ronpibon (1949) 78 CLR, at p 60 . (at p193)

26. So far as concerns the actual apportionment made by Yeldham J., it is enough to say that nothing said in argument would lead me to disturb it. This is not to say that the approach to apportionment taken by his Honour was the only correct method or that it would be appropriate in all circumstances. Other equally acceptable methods might well produce somewhat different results; after all, any apportionment of the kind contemplated by s. 51 (1) must necessarily very often be a rough and ready process. (at p193)

27. I would allow the appeal; the deductions claimed by the taxpayer should have been allowed to the extent of one-fifteenth of his total outgoings in respect of interest, municipal and water rates and insurance premiums. (at p193)

MASON J. I am in general agreement with what Wilson J. has written in this case, incorporating, as it does, his judgment in Federal Commissioner of Taxation v. Forsyth Post, p. 207. . (at p193)

2. Reflection on the argument presented by Mr. Priestley for the appellant has not persuaded me that the decisions in Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397; 3 ATR 165; 72 ATC 4094 and Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38 were wrong or that they were incorrectly based on a view that outgoings by way of interest were "of a capital, private or domestic nature" within the meaning of s. 51 (1). (at p193)

3. It is because the study in these cases and the case now under consideration, despite its predominant use for the purposes of the taxpayer's profession or employment, remains an integral part of the home that expenditure referable to it is an outgoing having the character described. Here the study is a room in the taxpayer's home, not separate from it in any way, having no distinctive physical characteristics, readily capable of other use for family purposes, and in fact used for non-professional purposes from time to time. Moreover when used for professional work it is ordinarily used only for professional work that can be done at home, in the evenings and at weekends, e.g. working on briefs and preparing opinions. Expenditure related to the study is therefore referable to the home. The "essential character of the expenditure", to take up the expression used in Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478, at p 497 , is therefore that of a "capital, private or domestic nature". (at p194)

4. With Wilson J. I agree that outgoings incurred in gaining or producing assessable income and outgoings of a capital or domestic nature are not mutually exclusive. Whether the same is true of outgoings of a private nature is a question that may be left to some future occasion. The very form of s. 51 (1) recognises that there are some outgoings which, though incurred in gaining assessable income, nevertheless fall within the exception. Then, to the extent to which they have the latter character, they are not allowable deductions. Plainly enough, the language of s. 51 (1) permits apportionment in those cases in which the expenditure in part relates to an outgoing of a capital, private or domestic nature and in part to a revenue earning item, where the expenditure is severable or capable of being apportioned. However, this is not such a case for, in the light of what I have said, the claimed expenditure, though referable to the study, was of the excepted kind. (at p194)

5. I do not agree that in determining the "essential character of the expenditure" we should look only to the use to which the study is put, though use is obviously a matter of great importance. It is necessary to look to the character of what is said to have been acquired by means of the expenditure, namely the study, and to its relationship to the home of which it forms part, in order to decide whether the expenditure falls within the exception. (at p194)

6. The outgoing consisted of interest payable on moneys borrowed to purchase a home. The fact that the home included a study and that the taxpayer proposed to use the study predominantly for professional purposes are quite consistent with the expenditure being of a capital, private or domestic nature. (at p194)

7. It is not altogether clear to me why the taxpayer gives so much emphasis to the circumstance that the study is predominantly used by him for professional purposes. On the principle for which he contends it appears to be a relevant, but not a necessary, factor, except in so far as it relates to the quantum of interest claimed. As the decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v. Banks (1978) 8 ATR 421; 78 ATC 6,001 shows, if the taxpayer's argument be correct, a taxpayer would be entitled to secure a deduction referable to a dining room in which he does professional work from time to time on the dining room table. In my opinion interest in such a case falls fairly and squarely within the exception in s. 51 (1). In passing I note that in Banks no attention at all was given to the purpose for which the moneys secured by mortgage were borrowed. The facts recited in the judgment are consistent with a borrowing for private or domestic purposes and the subsequent formation of an intention to use the dining room for the purpose of work - circumstances which in my view would provide a further ground for denying a deduction in respect of the liability for interest. (at p195)

8. 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. (at p195)

9. 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 (1969) 45 TC 287, at pp 297, 300 merely reflect what was the practice of the Commissioners under the English legislation. (at p195)

10. There is no occasion for me here to re-examine that part of the decision in Faichney (1972) 129 CLR 38 that resulted in the allowance of expenditure incurred by the taxpayer for light and heating whilst he was working in his study at home. At the time it seemed to me that a distinction, albeit a fine one, could justifiably be made between expenditure incurred in connexion with the acquisition of the study as part of the home and expenditure not so incurred, but necessarily incurred in the course of engaging in revenue earning activities which the taxpayer undertook in his study. As I say, that question does not presently arise. (at p196)

11. In the result I would dismiss the appeal. (at p196)

MURPHY J. 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 (1979) 53 ALJR 362; 24 ALR 217; 9 ATR 638; 79 ATC 4, 133 ; McCormack v. Federal Commissioner of Taxation (1979) 143 CLR 284 ). 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 (1949) 78 CLR 47, at p 56 ). The insertion of this exception may be attributed to an intention to emphasize this point. (at p196)

2. 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. (at p196)

3. As Mason J. said in Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38, at p 43 : "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." (at p197)

4. Mason J. considered this view to be in accord with the decision of Walsh J. in Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397, at p 399; 3 ATR, at p 168; 72 ATC, at p 4097 , 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." (at p197)

5. 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. (at p197)

6. 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. (at p197)

7. 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. (at p198)

8. 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. (at p198)

9. The appeal should be dismissed. (at p198)

AICKIN J. 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. (at p198)

2. 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. (at p198)

3. 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 (1958) 100 CLR 478, at p 497 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. (at p199)

4. Leaving to one side for the moment Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397; 3 ATR 165; 72 ATC, at p 4094 and Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38 , 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 (1972) 128 CLR 171 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 (1949) 78 CLR 47, at p 56 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. (at p200)

5. 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 (1959) 101 CLR 30 , 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 (1971) 125 CLR 494, at p 498 . 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. (at p200)

6. 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. (at p201)

7. In my opinion the taxpayer's appeal should be allowed. (at p201)

WILSON J. 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 (1972) 46 ALJR 397; 3 ATR 165; 72 ATC 4094 , Mason J. in Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38 and Helsham J. in Federal Commissioner of Taxation v. McCloy (1975) 1 NSWLR 202 , and dismiss the appeal. The taxpayer now appeals by special leave to this Court. (at p201)

2. 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. (at p202)

3. In view of the foregoing considerations, and for the reasons I have given in Forsyth 148 C.L.R. 203. , 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. (at p202)

4. I would dismiss the appeal. (at p202)

Orders

Appeal dismissed with costs.