Hysfour Pty Ltd and Commissioner of Taxation - [2005] AATA 289

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2005] AATA 289

ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2004/34

TAXATION APPEALS DIVISION

Re: HYSFOUR PTY LTD

Applicants

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal: Mr B.H. Pascoe, Senior Member

Date: 24 March 2005

Place: Melbourne

Decision:The Tribunal sets aside the objection decision under review and in its stead allows the objection to the non allowance of legal expenses of $39,781 in the years ended 30 June 2001 and 30 June 2002 in full.

(sgd) B.H. Pascoe
Senior Member

INCOME TAX – legal expenses – personal injury when mowing grass of taxpayer's property – whether individual agent of company – whether property for purpose of deriving assessable income

Income Tax Assessment Act 1997

REASONS FOR DECISION

24 March 2005 Mr B.H. Pascoe, Senior Member

This is an application to review a decision of the Commissioner of Taxation (the respondent) to disallow objections to assessments of income tax for the years ended 30 June 2001 and 30 June 2002. The objection was against the non‑allowance as a deduction of legal expenses incurred by the applicant.
At the hearing the applicant, Hysfour Pty Ltd ("Hysfour"), was represented by Mr P. Malseed, a director and secretary of Hysfour. The respondent was represented by Ms S. Jacobson of counsel. Evidence was given by Mr Malseed; his wife, Mrs K. Malseed; his mother, Mrs R. Malseed; and Ms D. McKinnon.
Hysfour is the owner of a farming property of approximately 190 hectares at Macarthur in Victoria which was acquired in 1986. On the property is a dwelling within a fenced area of approximately one‑third of a hectare. On 16 August 1997, Mr Malseed was mowing the grass around the dwelling when a stone was thrown from underneath the mower and struck the young son of a friend of Mr Malseed in the eye. The chronology of legal action which followed was:
3 August 1998     the child through his mother filed a writ for damages against Mr Malseed.
9 July 1999Mr Malseed joined the father of the child as a third party claiming negligence in supervising the child.
16 May 2000       Hysfour filed a statement of claim against Commercial Union Insurance Company of Australia Ltd (CGU) as its insurer.
25 June 2001     the child filed an amended statement of claim joining Hysfour as a second defendant.
9 August 2001     Court approved compromise of claim.

The terms of the settlement were that the plaintiff received $150,000 plus costs with Mr Malseed and Hysfour to bear their own costs. The legal costs relating to this matter, borne by Hysfour, amounted to $39,781.48, of which $900 was paid in the year ended 30 June 2001 and the balance in the year ended 30 June 2002.

Mr Malseed said that there had been an oral lease of the farming property from Hysfour to himself since 1986. He said that the property was purchased by Hysfour as a family company controlled by his late father who died in 1997. He maintained that his lease did not include the dwelling and its immediate environs and that his parents had plans to develop the dwelling for rental as a bed and breakfast property. Until some time in 1992, the dwelling and its garden were maintained by his parents. The concept of a bed and breakfast use of the property was not proceeded with as, although the location may have been suitable, the lease was not considered adequate and no interest was created. In May 1996, the house was occupied by Ms Denise McKinnon, a sister‑in‑law of Mr Malseed, and she remained in occupation until some time in 1999. Mr Malseed said that the arrangement with Ms McKinnon was that she would not pay rent, but provide, at least, six hours per week in monitoring the water bore and pump, fences and stock on the property. He considered that her occupancy also provided security for the company's property in the event of fire. Mr Malseed lived some distance away and visited the property weekly. Under the agreement for occupancy of the residence, toilet and kitchen facilities were to be made available for the use by shearers when conducting shearing operations on the property involving some 700 sheep, owned by Mr Malseed.
Mr Malseed said that Ms McKinnon mowed the grass around the residence on a few occasions with a mower borrowed from her father. He understood that her father then gave her an old mower, but it did not work adequately and Mr Malseed told Ms McKinnon not to bother attempting to do the mowing as he would do it. He maintained that, prior to and on most occasions during the occupancy of the residence by Ms McKinnon, either he or his wife mowed the grass around the residence.
Mrs Karen Malseed stated that she had mowed the lawn at and around the residence on a regular basis as a consequence of acute back problems of Mr Malseed. She said that she performed the task prior to and during the occupancy of Ms McKinnon and has continued with subsequent tenants.
Mrs Rachel Malseed said that the terms of agreement with Mr Malseed for the use of the property included a requirement that he would be responsible for the maintenance of the residence and garden. She was aware that Ms McKinnon had mowed the grass on occasions but, primarily, that work was done by Mr Malseed or his wife. She accepted that the occupancy was beneficial to Mr Malseed in providing an oversight of his livestock. She confirmed the evidence of Mr Malseed that the residence was not included in his tenancy given the intention of her late husband and herself to develop the residence as a bed and breakfast property.
Ms McKinnon gave evidence that she occupied the residence from May 1996 until 1999 under an arrangement that, in lieu of rent, she would provide services of monitoring the security of the total property, including water, fencing and livestock. In addition, she did some plastering and painting of part of the interior. She said that she had always believed that the mowing of the grass was to be the responsibility of Mr Malseed or his wife. Although she had an unreliable old mower of her father's, she used it on a few occasions only and the mowing was done regularly by Mr Malseed or his wife.
Mr Malseed submitted that the residence was held by Hysfour for the purpose of producing assessable income and the mowing of the grass on the block containing that residence was done by him as agent for Hysfour. He argued that any liability for damage caused as a result of such mowing was a liability of the company and the fact that the company's insurer paid the compensation for the injury to the child supported this view.
Ms Jacobson submitted that there was no lease of the residence between Hysfour and Ms McKinnon. Whilst the respondent accepted that the lease with Mr Malseed did not include the residence and its environs, it was said that there was no consideration derived by Hysfour from Ms McKinnon nor did she have exclusive possession. As a consequence, it was said that the occupancy did not produce or gain assessable income for Hysfour. It was argued that any consideration in the provision of services was for the benefit of Mr Malseed as tenant of the farming land and had no relationship to any income producing activities of the company. It was further submitted that the mowing activities related to the residence were performed by Mr Malseed as a favour to Ms McKinnon as a relation and not in any capacity as agent for the company. Ms Jacobson submitted that much of the legal expenditure in relation to the damages writ was incurred prior to any action against the company or joining the insurer. Consequently, it was said, the expenditure was incurred by Mr Malseed when no action existed which could be said to be putting the company at risk.
Based on the evidence, I am satisfied that the residence and its immediate environs were held by Hysfour for the purpose of producing assessable income separately from the balance of the property leased to Mr Malseed for farming purposes. The evidence demonstrated that, prior to the occupation by Mr Malseed, the company had not been able to derive income from the residence, but the property had been maintained by the company through its agents Mr and Mrs Malseed. It is clear, also, that, subsequent to the occupation by Ms McKinnon, the residence has been leased and rental income derived from other tenants. Notwithstanding some possible contradictory statements in earlier correspondence with the respondent, I am satisfied from the evidence at the hearing that the mowing of the grass was both expected and normally performed by Mr and Mrs Malseed on behalf of Hysfour as owner.
The question of whether there was a lease or some form of tenancy agreement between Hysfour and Ms McKinnon at the time of the accident is not without doubt. However, it is clear that Hysfour was the owner of the property and, by agreement with its agent, Mr Malseed, Ms McKinnon had a right of occupancy. Whilst it must be accepted that part, at least, of her services in lieu of rent were provided for the benefit of Mr Malseed in his farming operations, I am prepared to accept that her occupancy and some services provided by her were for the benefit of the company. As I have accepted that the residence was separately held by Hysfour for the purpose of producing assessable income, I am, on balance, prepared to accept that the function of mowing the grass was incidental and relevant to that purpose.
It is not disputed that the legal expenses were paid by Hysfour. Whilst some of those expenses related directly to the claim against Mr Malseed personally and were incurred prior to Hysfour being joined in the action for damages, I accept that Mr Malseed was acting as agent for Hysfour and, as subsequently happened, was able to seek indemnity from that company and, in turn, its insurer. Whilst the matter was resolved by way of settlement without necessarily admitting liability of any one party, it is relevant that the insurer, under the policy with Hysfour, provided the settlement amount.
As a consequence of the foregoing, I find that the legal expenses incurred by Hysfour were incidental and relevant to its income producing activities and are an allowable deduction.
The objection decision under review should be set aside and, in its stead, the objection to the non allowance of legal expenses of $39,781 in the years ended 30 June 2001 and 30 June 2002 allowed in full.

I certify that the fifteen [15] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd) Catherine Thomas
Clerk

Date of Hearing:  4 March 2005
Date of Decision:  24 March 2005
Advocate for the applicants:        Mr P. Malseed, Director and Secretary of Hysfour Pty Ltd
Counsel for the respondent:         Ms S. Jacobson
Solicitor for the respondent:        Australian Taxation Office, Legal Services Branch