Lambourne and Commissioner of Taxation (Taxation)

[2020] AATA 4562

Lambourne and Commissioner of Taxation (Taxation) [2020] AATA 4562 (12 November 2020)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:2019/4733            

Re:Cameron Lambourne

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Member D Mitchell

Date:12 November 2020

Place:Brisbane

The Tribunal affirms the decision under review.

....................[SGD]...................................................

Member D Mitchell

CATCHWORDS

TAXATION – income tax – deductions – employee – work-related clothing expenses – other work related expenses – incurred – in the course of deriving assessible income - substantiation of expenses – administrative penalty – whether failure to take reasonable care – whether penalty should be remitted – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth)

Taxation Administration Act 1953 (Cth)

CASES

Bhatti and Commissioner of Taxation [2016] AATA 24

Case 7/93 (1993) ATC 135

Commissioner of Taxation v Day [2008] HCA 53

Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93

FC of T v Cooper (1991) 29 FCR 177

Little and Commissioner of Taxation 2006 ATC 2488

Mansfield v Federal Commissioner of Taxation [1995] FCA 1008; (1995) 31 ATR 367

Morris & Ors v FCT (2002) 50 ATR 104

New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179

Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47

Sanchez and Federal Commissioner of Taxation [2008] AATA 896

Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483

Staker and Commissioner of Taxation [2007] AATA 1442

SECONDARY MATERIAL

TR 95/17 Taxation Ruling – Income tax: employee work-related deductions of employees of the Australian Defence Force

TR 97/24 Taxation Ruling – Income tax: relief from the effects of failing to substantiate

REASONS FOR DECISION

Member D Mitchell

12 November 2020

INTRODUCTION

1. Mr Cameron Lambourne (the Applicant) is seeking review of an objection decision of the Commissioner of Taxation (the Respondent) dated 16 November 2018.[1]

   [1]    Exhibit 1, T Documents, T2, pages 4-16, Notification letter and reasons for decision.

2. The reviewable objection decision disallowed the Applicant’s objection to a Notice of amended assessment for the income year ended 30 June 2017 (the 2017 year) and the associated shortfall penalties. The reviewable decision was made on the basis that the Respondent disallowed a number of deductions being claimed by the Applicant and considered there were no grounds for remission of the imposed shortfall penalty.[2]

   [2]     Exhibit 1, T Documents, T2, pages 5-16, Reasons for decision.

3. The present dispute before the Tribunal relates to the deductibility of the Applicant’s claimed work related clothing and other work related expenses.

   ISSUES

4. Throughout the Tribunal process the scope of the deductions being disputed by the Applicant narrowed to include the following amounts:[3]

   [3]     As confirmed by the Parties at the Hearing: see Transcript page 5. The Tribunal notes that throughout      the material before the Tribunal the amount in dispute in these proceedings relating to D3 Work related   clothing varies between $1,505 and $1489.38, however the Applicant’s representative confirmed that it is       only the deductibility of the total of the invoices shown on the Glendinnings Report that the Applicant        continues to dispute. 

Item	Amount in dispute
D3 Work related clothing	$ 1,449.38
D5 Other work related expenses	$ 1,688.70
Total	$ 3,138.08

1. The issue before the Tribunal is whether the Applicant is entitled to deductions for work related clothing and other work related expenses in the amounts of $1,449.38 and $1,688.70 respectively in the 2017 year. 

2. To determine this issue the Tribunal must consider whether the expenses are deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and if so whether they have been substantiated under Division 900 of the ITAA 1997.

3. Additionally, there is an issue of whether the administrative penalty imposed on the Applicant for failure to take reasonable care was correct and if so, whether the penalty should be remitted.

   BACKGROUND

4. It is not disputed that on 27 July 2017, the Applicant, through his tax agent lodged his income tax return for the 2017 year.[4]

   [4]     Exhibit 1, T Documents, T3, pages 17-22, Income tax return for the year ended 30 June 2017.

5. During the 2017 year the Applicant was employed by the Australian Defence Force, as an Electronics Technician within the Navy.[5]

   [5]     Exhibit 1, T Documents, T3, page 18, Income tax return for the year ended 30 June 2017.

6. In his income tax return the Applicant claimed the following deductions:[6]

   [6]     Exhibit 1, T Documents, T3, page 18, Income tax return for the year ended 30 June 2017.

Item	Description	Amount
D1	Work related car expenses	$ 3,300.00
D2	Work related travel expenses	$    200.00
D3	Work related clothing expenses	$ 1,655.00
D5	Other work related expenses	$ 5,840.00
D9	Gifts or donations	$ 360.00
D10	Cost of managing your tax affairs	$ 114.00
Total deductions	$11,469.00

1. The Respondent issued a Notice of assessment for the 2017 year on 3 August 2017 which resulted in the Applicant receiving a refund of $5,305.61.[7]

   [7]     Exhibit 1, T Documents, T4, pages 23-24, Notice of assessment for the year ended 30 June 2017.

2. On 12 February 2018, the Respondent advised the Applicant that his income tax return for the 2017 year was being audited as his work-related expense claim was higher than expected compared to similar taxpayers.[8] The items subject to the audit were the deductions claimed at D1, D3 and D5 of the Applicant’s income tax return, totalling $10,795.00.[9] 

   [8]     Exhibit 1, T Documents, T5, page 26, Audit notification.

   [9]     Exhibit 1, T Documents, T5, page 28, Audit notification.

3. Throughout the audit process the Applicant provided further information to the Respondent and the Respondent sought information from the Department of Defence in relation to the Applicant’s duties, allowances and expenses.

4. As a result of the audit process the Respondent allowed deductions for the following amounts of the original amounts claimed:[10]

   [10]    Exhibit 1, T Documents, T17, pages 275-281, Notification letter finalisation of audit and reasons for        decision.

Item	Original Amount	New Amount
D1 Work related car expenses	$ 3,300.00	$ 0.00
D3 Work related clothing	$ 1,655.00	$ 150.00
D5 Other work related expenses	$ 5,840.00	$ 209.00
Total	$ 10,795.00	$ 359.00

1. On 31 May 2018, the Respondent issued a Notice of amended assessment for the 2017 year. The difference in the result of the notice led the outcome of the notice being that the Applicant had an amount payable of $3,861.32.[11]

   [11]    Exhibit 1, T Documents, T18, pages 282-285, Notice of amended assessment for the year ended 30       June 2017.

2. The Respondent imposed an administrative penalty at 25% of the shortfall amount which equated to $937.55.[12]

   [12]    Exhibit 1, T Documents, T17, pages 279-281, Reasons for decision.

3. On 29 August 2018, the Applicant objected to the audit decision.[13]

   [13]    Exhibit 1, T Documents, T19, pages 286-310, Objection, reasons for objection and attachments.

4. On 16 November 2018, the Respondent disallowed the Applicant’s objection.[14] 

   [14]    Exhibit 1, T Documents, T2, pages 4-16, Notification letter and reasons for decision.

5. On 31 July 2019, the Applicant lodged an Application for Review with this Tribunal.[15]

   [15]    Exhibit 1, T Documents, T1, pages 1-3, Application for Review.

6. On 3 April 2020, a Hearing was conducted using a combination of the Microsoft Teams platform and telephone. At the Hearing the Applicant appeared by telephone and provided evidence under affirmation. The Applicant was represented by Mr Woodward, his tax agent who appeared by Microsoft Teams. The Respondent was represented by Mr O’Seighin who also appeared by Microsoft Teams.

   LEGISLATIVE FRAMEWORK AND PRINCIPLES

7. The relevant law in this matter includes the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Taxation Administration Act 1953 (Cth) (TAA 1953).

8. Where a taxpayer is dissatisfied with an objection decision made by the Respondent they may apply to the Tribunal for a review of the decision or appeal to the Federal Court against it.[16]

   [16] Section 14ZZ of the TAA 1953.

9. On application for review of a reviewable objection decision, the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been.[17] As such to be successful in his application before this Tribunal the Applicant must prove that he is entitled to the disputed claimed deductions and that the shortfall penalties were incorrectly applied or should otherwise be remitted.

   [17] Section 14ZZK(b)(i) of the TAA 1953

10. The general deductibility and substantiation provisions of the ITAA 1997 are the key provisions for consideration by the Tribunal in this matter.

11. Section 8-1 of the ITAA 1997 relevantly provides:

    General deductions

    (1)You can deduct from your assessable income any loss or outgoing to the extent that:

    (a)it is incurred in gaining or producing your assessable income; or

    (b)……

    (2)However, you cannot deduct a loss or outgoing under this section to the extent that:

    (a)    it is a loss or outgoing of capital, or a capital nature; or

    (b)    it is a loss or outgoing of a private or domestic nature; or

    …

12. Section 6-5(1) of the ITAA 1997 provides:

    Your assessable income includes income according to ordinary concepts, which is called ordinary income.

13. It has been long settled that incurred “in” gaining or producing means incurred “in the course of” producing assessable income. The High Court in Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 explained at 57:

    … 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.

14. In the Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93 (Payne) the High Court at [11] provided that given the breadth of the phrase assessable income it should be considered in terms of a taxpayer’s overall income producing activities:

    Accepting, as one must, that "the assessable income" referred to in s 51(1) is a broad concept, it may well follow, as the majority of the Full Court said, that "[t]he relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income"[16]. That is not to say, however, that the kind of connection which s 51(1) requires between outgoing and income is other than the connection described as "incurred in gaining or producing the assessable income". The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive of actual or expected income?

    (Emphasis added)

15. In regard to the question posed by section 8-1 of the ITAA 1997, the High Court observed in the Commissioner of Taxation v Day [2008] HCA 53 at [30] (Day):

    Section 8-1(1)(a) is couched in terms intended to cover any number of factual and legal situations in which expenditure is incurred by a taxpayer. Its language and breadth of application do not make possible a formula capable of application to the circumstances of each case. Cases are helpful to show the connection found on the facts there present, but not always to explain how the search for the requisite connection is to be undertaken. Payne directs attention to the statement made in Ronpibon Tin, as to the question posed by a provision such as s 8-1(1)(a), as correct and appropriate to be applied. The question, as restated in Payne, is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?"  That inquiry will provide a surer guide to ascertaining whether a loss or expenditure has been "incurred in [the course of] gaining or producing … assessable income".

16. In relation to establishing that a loss or outgoing was incurred, Dixon J in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 said:

    To come within [the] provision there must be a loss or outgoing actually incurred. “Incurred” does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which no more than impending, threatened or expected.

17. For the purposes of section 8-1 of the ITAA 1997 a loss or outgoing is only deductible where it is incurred in gaining or producing the taxpayers assessable income.

18. In Little and Commissioner of Taxation 2006 ATC 2488 (Little), the taxpayer was a nominated agent of a hose part franchise who had his claim for deductions for tool and phone expenses disallowed, Deputy President Block at 2497 found that the expenses were incurred ‘in the hope that the Company’s business would be successful and so that it would be able to pay him a return’. Deputy President Block stated at 2499:

    It cannot be doubted that the wording of section 8-1 is such that a deduction is permitted only where it is incurred in the derivation of the taxpayer’s income. In this case the Applicant conducted no business at all; the business was conducted by the Company.

19. In Staker and Commissioner of Taxation [2007] AATA 1442 (Staker) the taxpayer was employed as a fitness instructor and sought to claim a deduction for amounts spent on client and staff gifts. Finding that at the time those expenses had no association with the taxpayers derivation of her assessable income, Deputy President Hack said at [29]:

    I turn then to a consideration of the claim to deduct the sum of $4,737.04 described as “client and staff gifts” and similar claims. Ms Staker was an employee; she was not operating a business as a self-employed person. Whilst the expenditure may have been incurred in connection with her employment it was not incidental and relevant to the derivation of her income. It is not enough that the expenditure may have increased goodwill towards Ms Staker from clients and staff; it must be incurred in the course of gaining or producing the assessable income.

20. Deductibility of work related clothing and accessories was considered by Hill J in Mansfield v Federal Commissioner of Taxation [1995] FCA 1008; (1995) 31 ATR 367 (Mansfield). The taxpayer was a flight attendant who sought to claim a deduction in relation to stockings and cabin shoes of which she purchased to wear to work to meet the stimulated uniform standard. In referring to his decision in FC of T v Cooper (1991) 29 FCR 177 (Cooper), Hill J emphasised that the fact that expenditure is required to be incurred by an employee will not necessarily bring about deductibility. Hill J referred to his decision in Cooper at 200 where he said:

    Assuming that that letter was a direction lawfully given under Mr Cooper's contract, it does not follow that the expenditure must be deductible. An employer may require an employee to travel to and from work by a particular mode of transport, but the fact that the employee is required, as a term of his employment, to incur a particular expenditure, does not convert  expenditure that is not incurred in the course of the income producing operations into a deductible outgoing. If it did, then, no doubt, employers would be besieged by employees with requests that the employer should require the particular expenditure to be incurred. There may be cases where the fact that expenditure is required to be made assists an employee to show the relevant connection between the outgoing and the activities which produce assessable income, but the decision of the High Court in FCT v Finn (1961) 106 CLR 60, shows that there was no difference in the  availability of a deduction for overseas travel expenditure, between those expenses which the taxpayer there incurred in travelling to South America at the request of his employer, and  those which he incurred in travelling to Great Britain and Europe in his own vacation time. There was, in each case, the necessary connection between the expenditure and the taxpayer's income-earning activities as an architect.

21. Further, Hill J at 375 said:

    It can be said that generally expenditure on ordinary articles of apparel will not be deductible, notwithstanding that such expenditure is necessary to ensure a suitable appearance in a particular job or profession.

    ……

    At the other end of the spectrum, the expenditure upon a distinctive uniform by an employee would ordinarily qualify for a deduction. A uniform is not merely a set of clothes reserved for the occasion of work. Rather it is the fact that the uniform has a distinctive characteristic which provides the nexus between the expenditure on the uniform and the work activity, …..

22. Guidance is provided in relation to work related deductions by TR 95/17 Taxation Ruling – Income tax: employee work-related deductions of employees of the Australian Defence Force (TR95/17).

23. In Morris & Ors v FCT (2002) 50 ATR 104 (Morris) it was found that the taxpayers claims for deductions in relation to expenditure on sun glasses, hats and sunscreen should be allowed on the basis that their work activities required them to purchase the items in order to gain their assessable income in a non-harmful manner. The distinction made by Goldberg J is that such an expenditure must be required for a purpose beyond the role of serving the purpose of appropriate clothing for a role, the work environment must require it for an additional safety reason. Goldberg J said at 128:

    …the distinction is determined by asking whether the relevant work of the taxpayer which must be carried out in order to gain or produce assessable income is to be carried out in conditions which expose the taxpayer to factors such as the ultraviolet rays of a solarium, the heat, flames and sparks from a blast furnace or the harmful rays and ultraviolet radiation from the sun. If the answer to this question is in the affirmative, then the expenditure on items such as sun protection items used and applied during the undertaking of the work will not be expenditure of a private nature but will rather be expenditure relevant and incidental, and with a sufficient nexus, to the gaining or producing of assessable income.

24. In relation to substantiation requirements, Division 900 of the ITAA 1997 sets out the rules in respect of “work expenses”. Work expenses are defined in section 900-30 of the ITAA 1997 to mean “a loss or outgoing you incur in producing your salary or wages”.

25. Section 900-15 of the ITAA 1997 provides:

    900-15 Getting written evidence

    (1)To deduct a work expense:

    (a)it must qualify as a deduction under some provision of his Act outside this Division; and

    (b)you need to substantiate it by getting written evidence. Subdivision 900-E tells you about the evidence you need.

26. In Bhatti and Commissioner of Taxation [2016] AATA 24 at [31] (Bhatti), Senior Member Lazanas helpfully explained the substantiation requirements as follows:

    Subdivision 900-E is directed towards the written evidence required for the purposes of s 900-15. Section 900-105 explains that the legislation provides for a set of rules for getting written evidence to substantiate deductions and that the rules that can be used depend on the type of expense. Section 900-110 provides that there is no time limit for getting written evidence of an expense (unless the expense is recorded by the taxpayer in specified situations), “[b]ut until you get written evidence of it, you are not entitled to a deduction for the expense”. Section 900-110(2) further provides that if “when you lodge your *income tax return for the income year you have good reason to expect to get written evidence of the expense within a reasonable time, you can deduct the expense without actually getting the evidence. But if you don’t get the evidence within a reasonable time, your entitlement to the deduction ceases...”

1. Section 900-115 in Subdivision 900-E (Written Evidence) outlines relevantly, the requirements in relation to written evidence from a supplier as follows:

   900-115 Written evidence from supplier

   …..

   (2)      You must get a document from the supplier of the goods or            services the expense is for. The document must set out:

   (a)     the name or business name of the supplier; and

   (b)     the amount of the expense, expressed in the currency in which it      was incurred; and

   (c)     the nature of the goods or services; and

   (d)     the day the expense was incurred; and

   (e)     the day it is made out.

   (3)       There are 2 exceptions to these requirements:

   (a)     if the document does not show the day the expense was incurred,     you may use a bank statement or other reasonable, independent evidence that shows when it was paid;

   (b)     if the document the supplier gave you does not specify the nature     of the goods or services, you may write in the missing details          yourself before you lodge your *income tax return for the income year.

   ...

2. Section 900-195 in Subdivision 900-H (Relief from effects of failing to substantiate) of the ITAA 1997 provides a discretion to allow a deduction where there has been a failure to substantiate:

   900-195 Commissioner’s discretion to review failure to substantiate

   Not doing something necessary to follow the rules in this Division does not affect your right to a deduction if the nature and quality of the evidence you have to substantiate your claim satisfies the Commissioner:

   (a)     that you incurred the expense; and

   (b)      that you are entitled to deduct the amount you claim.

3. In regard to the extent of the operation of the substantiation provisions, Member Trowse in Case 7/93 (1993) ATC 135 provided at [26]:

   The Tribunal feels compelled to comment upon certain of the final submissions made on behalf of the applicant. It seems that the tax agent representing the applicant is of the view that the requirements of substantiation should be administered in a practical and common sense way. He maintained that the getting of receipts and the making of diary entries were not practical and that the 'only fair approach is to make an annual estimate'. It seems that the purpose and design of this relatively new sub-division was to outlaw that very practice and the problems that flowed from it and there is no doubt that both the Commissioner and this Tribunal must interpret and apply the law as it appears in the legislation. It may well be that the keeping of documents and maintenance of records may cause inconvenience and that otherwise productive time is spent on recording but that is not to the point. If the deduction is sought, the substantiation requirement must be met. It seems probable that the introduction of these requirements was aimed at those taxpayers then abusing the system. Unfortunately all self-employed and employee taxpayers are caught in the substantiation net and must bear the consequences if they are to succeed with their claims.

4. In agreeing with that approach, Senior Member Dunne in Sanchez and Federal Commissioner of Taxation [2008] AATA 896 at [44]-[45] (Sanchez) provided that each case must be considered on its merits and a common sense approach applied. Senior Member Dunne provided the view that the nature and quality of the evidence that a taxpayer has to have to attract the exercise of the discretion should consist of the existence of some evidence that shows that expenditure was incurred and there was an entitlement to a deduction and that such evidence is contemporaneous and certain.

5. Guidance on the Respondent’s view of the exercise of the substantiation discretion provided by section 900-195 of the ITAA 1997 is set out in TR 97/24 Taxation Ruling – Income tax: relief from the effects of failing to substantiate (TR97/24).

6. TR 97/24 relevantly provides:

   13. It is the Commissioner’s view that relief is not available where there is no supporting documentation or factual material evidencing the expense. It follows that a taxpayer’s estimate of an expense supported only by an assertion that the estimate is reasonable does not constitute evidence of a nature and quality to satisfy the Commissioner to exercise the discretion.

   ……

   38. Section 900-195 of the Act gives the Commissioner discretion to grant relief where the nature and quality of the evidence available to substantiate a taxpayer's claim satisfies the Commissioner that:

   (a)       the expense was actually incurred by the taxpayer; and

   (b) the taxpayer is entitled to deduct the amount claimed.

   39. In reaching this decision, the Commissioner is directed to have regard to the nature and quality of the evidence that the taxpayer has available to substantiate the claim. It is consistent with the terms of the law that no relief is available in respect of a claim where there is no supporting documentation or factual material evidencing the expense.

   Sufficient evidence

   40. The central issue in deciding whether this discretion ought to be exercised is whether the evidence available:

   (a) satisfactorily quantifies the amount of the expense; and

   (b) establishes the extent to which the taxpayer is entitled to claim a deduction.

   41. It is not possible to specify the nature and quality of supporting evidence that satisfies the Commissioner in all circumstances. Each case must be considered on its own merits and a common sense approach applied.

   42. When deciding whether to exercise this discretion, the Commissioner is not limited to considering documentary evidence. A wide variety of factual information can be relevant. For example, in deciding whether the Commissioner is satisfied that car expenses have been incurred and are deductible to the extent claimed, a relevant piece of evidence might be that a particular motor vehicle is used in operating a driving school rather than merely occasionally in producing assessable income.

   43. A bona fide attempt to comply with the substantiation requirements is likely to assist taxpayers in relation to the nature and quality of the evidence they hold.

   44. If a taxpayer has made little or no attempt to comply with the substantiation requirements, the nature and quality of supporting evidence available is likely to be poor. It is the clear intention of the substantiation provisions that deductions are generally not allowed where there is no supporting documentation or factual material evidencing the expense.

   45. In cases where there has been a failure to comply with the substantiation requirements, the taxpayer may face practical difficulties in satisfying the Commissioner that the claimed amount of an expense has been incurred and is deductible. Such cases frequently involve estimates by the taxpayer of expenses incurred. An unsupported statement by a taxpayer as to the amount of an expense incurred does not, of itself, constitute evidence of a nature and quality to satisfy the Commissioner that the discretion should be exercised.

7. Section 900-205 in Subdivision 900-H (Relief from effects of failing to substantiate) of the ITAA 1997 provides relief from the substantiation requirements where documents are lost or destroyed during the retention period. Guidance in relation to the Respondent’s view on when that discretion should be exercised is also found in TR 97/24.

8. Administrative penalties may be imposed in a number of circumstances. Relevant to the present matter, section 284-75(1) of Schedule 1 to the TAA 1953 provides that administrative penalties may be imposed where:

   284-75 Liability to Penalty

   (1)you are liable to an administrative penalty if:

   (a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and

   (b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

9. Section 284-85 of Schedule 1 to the TAA 1953 outlines how the amount of penalty is to be calculated.

10. For current purposes section 284-90 of Schedule 1 to the TAA 1953 provides that the base penalty is 25% of the shortfall amount or part.

11. Section 298-20 of Schedule 1 to the TAA 1953 provides that the Commissioner has the power to remit all or a part of the penalty.

    EVIDENCE AND CONTENTIONS

    Evidence provided by the Applicant’s Employer

12. In response to a Third Party Information Verification request made by the Respondent,[18] Lieutenant NR Maguire on 23 March 2018, on behalf of the Department of Defence provided the following information:[19]

    [18]    Exhibit 1, T Documents, T7, pages 40-43, Correspondence from the Respondent to the ADF –   Employer           verification check.

    [19]    Exhibit 1, T Documents, T8, page 44, Correspondence from the ADF to the Respondent – Response      to employer verification check.

    1.        This member's title is Leading Seaman Electronics Technician.

    2.His duties include (but are not limited to, in a Minor War Vessel) maintenance of various electronic and mechanical systems: GPS and related navigational sensors communications systems, main and auxiliary propulsion, ship's hotel services etc.

    3.He will be receiving at least four allowances, and possibly more. The figures I quoted you are from my latest Salary Variation Advice, and therefore I expect that the member's would be significantly less (although they may not be). These allowances are;

    a.     Maritime Disability Allowance

    b.     Maritime Sustainability Allowance

    c.     Service Allowance

    d.     Uniform Allowance

    Allowances 1 and 2, I must stress, are only awarded when a member is serving in a sea-going billet. The member in question joined HMAS Wollongong in August 2017, and was entitled to them from then on. I do not know his previous entitlement.

    4.        The member may use his own car from time to time, but other than driving            to/from work, this would unlikely be significant.

    5.        The member is not provided with a mobile phone, but is required to have   one, and would make and receive mobile telephone calls.

    6.The member is not entitled to an employer-owned laptop. He may use his             own for works purposes, and would have provided the laptop and   associated internet usage himself.

    7.        I am unaware of the member undertaking educational courses.

    8.        In the normal course of events the member would not have expended                    significant funds on 'other expenses'.

13. On 11 April 2018, the Respondent sought further information from the Department of Defence in relation to the gym/fitness equipment on board the ship (reference is being made to the HMAS Larrakia during the applicable period) and if equipment is not provided if there is a requirement to purchase such equipment to carry out the role of Fitness Leader and the Applicant’s Electronics Technician position and the need for him to purchase equipment.[20]

    [20]    Exhibit 1, T Documents, T14, pages 251-256, Correspondence from the Respondent to the ADF.

14. On 13 April 2018, Lieutenant NR Maguire provided the following information in response:[21]

    [21]    Exhibit 1, T Documents, T15, pages 257-264, Correspondence from the ADF to the Respondent.

    Military Fitness Leader

    1.There is not a gym onboard, however a section of the upper-decks is used for exercising.

    2.There is gym equipment, and this is provided by the ADF through several different supply lines. There is no allowance issued to a member to augment this equipment.

    3.N/A [Noting the question was: If equipment is not provided, please advise if there is a requirement to purchase fitness equipment/sports gear (e.g. barbells, exercise benches, strength training gear, weight vests etc.) to carry out this role?]

    4.      The same does apply when working ashore.

    Electronics Technician

    1.All tools should be provided by the ADF. In the unusual (although occasional) event that equipment/tools are required to be purchased by the ship, the member would be reimbursed the cost (if approved). This is referred to as 'locally purchasing'.

    2.      There are computers available onboard. These are available after hours. The         member will sometimes be required to work after-hours. Only some of the         information we deal with is classified, the vast majority is not. A tablet is not      required for the role.

    ……..

15. Further on 13 April 2018, Lieutenant NR Maguire advised that he had recently been informed that the Applicant did indeed purchase gym equipment for the use of ships’ company and was not reimbursed, however he did not know the details or value of that equipment.[22]

    Applicant’s Evidence and Contentions

    [22]    Exhibit 1, T Documents, T16, pages 265-274, Further correspondence from the ADF to the Respondent.

    Work related clothing expenses

16. To substantiate his claimed deductions for work related clothing expenses the Applicant provided a customer transaction report from Glendinnings Menswear Pty Ltd (Glendinnings Report) which appears to have been printed on 18 February 2018 and relates to the period between 1 July 2016 to 29 June 2017.[23]

    [23]    Exhibit 1, T Documents T9, pages 54-55, Correspondence from John Woodward Accountants to the Respondent attaching the Glendinnings Report; this is also found at Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, Attachment A.

17. The Glendinnings Report contains a number of transactions which are described as “Direct Deposit”, “Invoice”, “Correction”, “Payout” or “Mgmt.Fee”. No details have been provided in relation to the items which were purchased and resulted in an invoice being issued. The following details are provided by the Glendinnings Report:[24]

    [24]    Exhibit 1, T Documents, T9, pages 54-55, Correspondence from John Woodward Accountants to the Respondent attaching the Glendinnings Report.

Date	Transaction Type	Amount
22 Jun 2017	Invoice	$ 5.00
06 Jun 2017	Invoice	$ 5.00
26 Apr 2017	Invoice	$ 5.00
05 Apr 2017	Invoice	$ 123.16
20 Jan 2017	Invoice	$ 81.42
19 Jan 2017	Invoice	$ 9.00
18 Jan 2017	Invoice	$ 82.80
18 Jan 2017	Invoice	$ 405.40
18 Jan 2017	Invoice	$ 115.00
18 Jan 2017	Invoice	$ 257.85
13 Jan 2017	Invoice	$ 8.00
14 Sep 2016	Invoice	$ 49.96
14 Sep 2016	Invoice	$ 172.76
06 Sep 2016	Invoice	$ 121.03
25 Jul 2016	Invoice	$ 8.00
Total Invoices	$ 1,449.38
01 Jul 2016	Management Fee	$ 40.00
TOTAL	$ 1,489.38

1. The Applicant provided information in relation Glendinnings Menswear Pty Ltd sourced from various internet pages which relevantly provided:[25]

   Title: Glendinnings Menswear – Famous for naval, maritime uniforms and quality menswear since 1951.

   Description: Glendinnings Menswear – Much more than an online store. Famous for naval & maritime uniforms and quality menswear since 1951.

   We specialise in Royal Australian Navy Uniforms – Merchant Navy, Uniforms for Shipping and Cruise Lines – Restaurants & Cafes – Charity – Corporate Events – Charter Boats – Yacht Clubs – Sports Clubs – Hospitality – RSLs.

   The largest range of Australian Naval, Merchant and Maine uniforms online Naval Best Sellers: DPNU, Navy undershirts, Officer ‘tropical’ shirts, embroidered name-tags, Cloth Patches. Epaulets, Mess Jackets, Trousers, Military Badges, Naval Caps, Ranks & Rates, Tally Bands, HMAS ships crests, DPNU ID Holders, Dispersed Pattern Naval Uniform, navy ball caps, navy buttons, pre-tied bow ties, RAN watches, RI badge, Recruit Instructor badge … Military Replica Medals: Campaign Medals, Service medals, Long Service Medals, World War 1 medals, World War 2 medals, Good conduct medal, Long service medals, Military Medal Mounting, SWAT boots.

   Quality work clothes, shirts, shorts, trousers, work boots. Ready to wear and tailored uniforms, customised to include your business identity.

   Famous men’s brands in-store: Leatherman, G-Shock, Electric, LED Lenser, 2XU, Rip Curl, Skullcandy, Zippo, New Balance, Dr Martens, Skins, Caribee, Jetpilot, Oakley, Billabong, Rip curl.

   [25]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, Attachment B.

2. The Applicant provided a Statutory Declaration dated 4 February 2020 stating the following:[26]

   3. With regard to items purchased from Glendinnings in Cairns before that company went into liquidation, I did not store details of invoices believing that because items were purchased on account, it would always be possible to get details of these invoices if required by the ATO. However, this was no longer possible once the company shut down and went into liquidation.

   4. I do not recall buying any items from Glendinnings which were not related to naval uniforms and distinctively navel in nature.  In the ATO rejection of my objection, they mention backpacks and caps. But the caps we buy are ship’s caps with the name on them. I would have bought a black duffel bag and black backpack there. But the latter to comply with naval dress regulations, has to be black and have minimal branding, and Glendinnings used to stock items which specifically conform to navy requirements.

   5. One possible contentious item here could be black dress shoes, which would have cost about $180.00. I have only ever worn these with my white Navy ceremonial uniform. Once again, I would have bought these to make sure they conform to navy regulations.

   [26]    Exhibit 4, Statutory Declaration of the Applicant, page 1.

3. At Hearing, consistently with his Statement of Issues, Facts and Contentions and previously provided submissions, the Applicant under affirmation told the Tribunal:[27]

   [27]    Transcript, pages 11-71.

   ·He has no recollection of purchasing anything from Glendinnings that was not part of his naval uniform.

   ·He could not remember the exact items he purchased from Glendinnings, however the types of things he would purchase were all in accordance with ABR 10, which is the Sailor’s Dress Manual, which is now ANP 4426-1203.

   ·He purchased black backpacks to ensure that he could transport his goods and services to sea, he would possibly take up to three back packs to sea at any one time. These would be used for taking his books and manuals, clothing and other effects to sea with him.

   ·He would have purchased boots, which cost approximately between $250.00 and $400.00, as when he does boardings his boots get wet. He was required to wear orthotics and the issue boots do not meet the needs to fit his orthotics so he purchased his boots from Glendinnings, possibly up to two or three sets of boots within that one year period.

   ·He purchased many grey shirts, as he maintains communication systems, weapon systems, combat systems and navigation systems, as such he works on everything electronic and maintains weapons systems onboard so he regularly gets dirty with grease and oil. He is also a qualified marine systems technician so in conducting work on main engines, assisting the marine engineering department he continuously got extremely dirty. It only takes one or two seconds then to where the clothing would “be pretty much useless” and he would have to replace it.

   ·He purchased blue and black socks.

   ·He purchased ID holders.

   ·He would purchase collared shirts for dress requirements if they had a mess function in civilian attire in accordance with ABR 10. He would purchase such items for that specific use only.

   ·He has had to purchase additional medals, because he is required to wear his medals on ANZAC day or any time he is required to wear his W7s, W6s or S6s or S7s (his uniform). 

   ·He had to purchase readiness going badges as well as additional lay badges which they wear on their sleeve.

   ·He had to purchase hats.

   ·As a Military Fitness Leader, he also had to purchase black shorts and socks to meet uniform requirements.

   ·His Navy Uniform is set out in the manual and every item from head to toe is specified.

   ·He would have purchased all items from the Glendinnings shop in Cairns.

   ·He contacted Glendinnings after the audit started and asked for a copy of the invoices but was only provided with the printout he provided.

   ·At the time he made purchases at Glendinnings he understood that all the details were on his profile and he would be able to get the invoices printed at a later date if they were needed. He did not get invoices at the point of sale.

   ·Glendinnings was open to the public.

   ·He would have given his accountant the work related clothing expense figure of $1,655.00 and he would have taken that off the Glendinnings statement that he has provided. When asked how that was possible as the statement provided to the Respondent and Tribunal was dated after he had lodged his tax return, he said that he would have had a copy of that and that is where he got the amount from. He did not know what happened maybe he lost the original copy and had to ask for another copy.

   ·When asked how does the issuing of his uniforms work? That you get issued with uniforms when you first join, so some 11 years 2 months ago for him (at the date of Hearing). They issued him with grey shirts, white underwear, white, blue and black socks. They provided a full set to show you what is allowed and what is the base standard. Then since that time when they issue stuff that is standard they no longer issue the full set, they no longer issue the grey shirts he had to purchase them himself. He had to purchase his socks, hats, caps, badges and all that type of stuff himself. He purchases his boots himself specifically because of his orthotics. The Navy use to have a policy in place where you were reimbursed for the cost of boots however now they only provide the orthotics and he has to purchase the boots to fit and that is what he has been doing and because they are specifically work related he has been claiming them in his tax return. The actual uniform gets exchanged, he does not have to purchase that. His PT gear is issued at the beginning but is not exchangeable, he has to purchase them himself.

1. The Applicant contended his claimed work related clothing expenses should be allowed as Glendennings Menswear Pty Ltd was a specialist store specialising in naval maritime uniforms and menswear.[28]

   [28]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, pages 1-2.

2. In the Applicant’s Statement of Facts Issues and Contentions, he provided the following contentions in relation to substantiation requirements:[29]

   [29]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, pages 2-3.

   Attached in support of our contention:

   Attachment A: Account statement from Glendinnings.

   Attachment B: Website references regarding Glendinnings.

   In regard to Section 900-205, we refer to TR97/24. It makes reference at para 20 to a "substitute document" — "a substitute that meets all the original requirements for substantiation (subsection 900-205(5)". Copies of the invoices which should have been available from Glendinnings would have satisfied this requirement.

   It is contented that paras 18-23 and paras 55-60 of TR97/2 support relief from the strict substantiation requirements.

   Alternatively, TR97/24 supports the contention that the Commissioner should exercise discretion to grant relief in terms of Section 900-195 of the Act.

   Paras 38-40 of TR97/24 state:

   38. Section 900-195 of the Act gives the Commissioner discretion to grant relief where the nature and quality of the evidence available to substantiate a taxpayer's claim satisfies the Commissioner that:

   (a)      the expense was actually incurred by the taxpayer, and

   (b)      the taxpayer is entitled to deduct the amount claimed.

   39. In reaching this decision, the Commissioner is directed to have regard to the nature and quality of the evidence that the taxpayer has available to substantiate the claim. It is consistent with the terms of the law that no relief is available in respect of a claim where there is no supporting documentation or factual material evidencing the expense.

   Sufficient evidence

   40. The central issue in deciding whether this discretion ought to be exercised is whether the evidence available:

   (a)      satisfactorily quantifies the amount of the expense; and

   (b)      establishes the extent to which the taxpayer is entitled to claim a        deduction.

   We contend that the Glendinning’s statement at Attachment A satisfactorily quantifies the amount of the expense. We contend that information about Glendenning’s at Attachment B establishes that amounts expended relate to deductible expenditure of Naval uniforms, specific Naval work clothes and Naval regalia.

   In the Decision on Your Objection, the Commissioner acknowledged at paras 36-37:

   (C) We accept that Glendinnings was a specialty in naval uniforms, including merchant marine and shipping lines. However, Glendinnings has gone into liquidation and the store website is now off-line.

   The ASIC website advises that the liquidators were appointed on 1 May 2018.

   However, this was qualified at para 38.

   (D) We also note that Glendinnings also sold general menswear, such as branded sports caps, surf-wear, sunglasses, backpacks and shoes.

   We argue that virtually everything which was sold at Glendinnings was in conformation with Navy Regulations — Regulation ABR81.

   The receiver referred to "branded sports caps, surf-wear, sunglasses, backpacks and shoes"

   In our Attachment B, we show "branded sport caps" — clearly deductible items. Taxpayer points out that Naval regulations requires that backpacks worn on duty must be black and have minimal branding. Sunglasses should be deductible in any case, and taxpayer states he would only have bought shoes there if he required shoes specifically conforming to Navy dress code (but not a likely purchase).

   In short, we contend that items purchased from Glendinnings are of a character which are deductible work expenses.

3. In closing submissions, the Applicant’s representative contended that:[30]

   ·The Applicant was relying on section 900-195 of the ITAA 1997 as elaborated on at paragraph 38 of TR97/24 and argues that Glendinnings were a specialist Navy outfitter. People went there to buy things that were part of the distinctive Navy uniform and if there were some items that were not deductible they would be “pretty minor” in extent.

   ·In relation to the Mansfield’s case that when you look at the Navy Code (Exhibit 7, ANP 4426-1203 Uniform Instructions for the Royal Australian Navy) it is incredibly specific about every item that the sailors wear down to the point it actually specifies the exact point on the uniform that a badge must be shown.

   ·The Applicant’s argument is that the Glendinnings expenditure was essentially work related and therefore deductible.

   ·Although the Applicant has not identified the individual nature of each Glendinnings’ invoices, section 900-195 establishes the extent to which a taxpayer is entitled to claim a deduction and because all of the invoices are from Glendinnings the evidence is overwhelmingly that they would be deductible work-related uniform expenses. Even things like the grey shirts are part of the Applicant’s disruptive pattern uniforms. As such the section 901-195 discretion should be applied.

   [30]    Transcript, pages 72-77 and 87.

   Other work related expenses

4. In relation to other work related expenses the Applicant provided the following details, substantiated by a document that provides a montage of online purchase order details:[31]

   [31]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, Attachment C.

Item	Date	Description	Amount
The below items was purchased for the use of multiple media devices to be used during briefs and presentations on board the ship.
Item 1	29 Mar 2017	HDMI Multi Display Auto Switch Box Splitter	$ 8.35
Item 2	18 Feb 2017	1 in 4 Out Port 1080P Full HD HDMI Splitter Hub Repeater Amplifier 3D	$ 28.99
The below item is replacement lenses for my sunglasses as it is a requirement for bridge watch keeper to wear polarized sunglasses for watch keeping purposes.
Item 3	28 Jun 2017	T.A.N Polarised Lenses Replacement for Oakley Turbine-Multiple Options	$ 23.98
The Below order was for HMAS Larakia to supply fitness equipment as the Patrol boats did not have any quality gym equipment so as the Military Fitness Leader I purchased this for the ship so that I could take weight classes and improve ship’s staff fitness.
Item 4	22 May 2017	30 kg Weighted Vest Adjustable	$ 82.90
Item 5	5 Jun 2017	Procircle Swing Suspension Trainer Kit	$ 52.99
Item 6	2 Sep 2016	Adjustable Weight FID Bench Flat Incline	$ 76.99
Item 7	21 Aug 2016	Bumper Weights Pckage	$ 1,295.00
Purchased for course which is a directed purchase from the RAN for my senior technician course.
Item 8	29 Jun 2017	New Casio FX Scientific Clculator	$ 48.50
Tablet/Laptop purchased for work
Item 9	21 Feb 2017	Tablet/Laptop depreciation purchased for $377.00	$ 71.00
TOTAL	$ 1,688.70

1. The Applicant’s substantiation document provides dates the item was ordered, the order total and name of the seller, other than in relation to the tablet/laptop they for all intents and purposes do not include the information usually expected to be found on an invoice or receipt.[32]

   [32]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, Attachment C.

2. By way of a Statutory Declaration dated 4 February 2020 the Applicant provided:[33]

   6. The ATO seems to argue that my naval salary only relates to duties as an Electronics Technician. On a smaller naval vessel, I had many ancillary duties, including watch keeping and military fitness training duties.

   7. It was explained in earlier correspondence that in my time on HMAS Larrakia, I was the only Military Fitness Leader on board, and I had the responsibility to organise fitness sessions with typically 12 to 15 crew members participating. This was part of my duties for which I was paid.

   8. I purchased the various items claims as “Other Work Related Expenses” online and kept the online records as proof of purchase.

   9. In rejecting my earlier objection, the ATO stated that even if the item of gym equipment costing $1,295 was a work expense, it would need to be depreciated. However, on board ship with salt air and vibration, and use by numerous crew members, it is almost certain that its useful life would be less than one year, in which case my Accountant believes would make it deductible outright.

   10. I need to wear polarized sunglasses to carry out my bridge watch duties.

   [33]    Exhibit 4, Statutory Declaration of the Applicant, page 1.

3. At Hearing, consistently with his Statement of Issues, Facts and Contentions and previously provided submissions, the Applicant under affirmation told the Tribunal:[34]

   [34]    Transcript, pages 10-71.

   ·As a Military Fitness Leader, he was required to ensure that he offers the service and maintains the service of subject matter expert for on board fitness. On average he would take a group of up to four or five people each day for fitness. These duties are covered through an allowance which the RAN refers to as ‘service allowance’, so it is an additional payment on top of your pay to cover additional aspects of work, so ancillary duties.

   ·When he is onshore he also takes a class for physical fitness, normally twice a week for an hour.

   ·When he is at sea he spends time as watchperson on the bridge and this requires polarised sunglasses. Polarised sunglasses are a requirement to be worn on the bridge. They are necessary to identify men overboard and allow you to give good, clear direction on their location and also for spotting targets and foreign objects in the water.

   ·The gunner and the watch get to use the ships set of polarised glasses, they are not even issued with a pair.

   ·He purchased gym equipment for use on HMAS Larrakia as at the time they were doing up to 13 weeks at sea at any one time and the crew was finding it difficult with the equipment that was onboard. He had discussed with the Navigational Officer the issue and decided that he would purchase the equipment and claim it as a tax deduction. He would utilise the equipment to train and ensure that people maintained their fitness, strength and a level of sanity whilst at sea. It would only take one time out at sea, a period of about 12 weeks for the equipment to become irreversibly impacted by salt water, causing corrosion, so if he was to remove  the equipment it would have broken down and fallen apart – becoming dangerous to use. So, it was agreed he would leave the equipment onboard. He did have a discussion regarding reimbursement for the gym equipment, however due to restraints on finances that did not occur.

   ·On cross examination, that gym equipment usually provided by the ADF through several different supply lines was not supplied to HMAS Larrakia at the time. He had a discussion with the right people before purchasing the equipment to make sure it was “Good to go”. Purchasing the equipment was part of the role. He could not remember if he had made similar purchases of equipment as part of his role since the 2017 year.

   ·How service allowances are paid and for what purpose. It is payment for ancillary duties undertaken by each person.

   ·He is a Sailor first and then an Electronics Technician.

   ·The box splitter and splitter hub were used to improve shipboard presentations. His role was to enable the presenter to deliver their presentation or for such a presentation to be received. They were used for the ship’s entertainment system. The provided tools were outdated. He sought reimbursement, however that was not received.

   ·When asked whether it was the Navy or the Applicant at his own discretion who decided that it would be advantageous to have a box splitter and splitter hub purchased, that it was his discretion as a Leading Seaman Electronics Technician to improve the entertainment systems onboard.

   ·He had a lot of books and engineering works stored on the laptop/tablet he had purchased. He disagreed that a tablet was not needed.

   ·He would have provided the figure of $5,840 in terms of other work related expenses to his Accountants. He would have calculated the figures using his invoices or eBay invoices, he would have used a spreadsheet where he keeps his costs and that is what he would have provided to them.

   ·He uses the scientific calculator in his role as an Electronics Technician.

4. The Applicant contended that the claimed other work related expenses are deductible as they were necessarily incurred in carrying out his duties.[35]

   [35]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, pages 3-4.

5. In closing submissions, the Applicant’s representative contended that:[36]

   ·In relation to the montage document it shows who sold the item, it does not have the supplier’s ABN and address, just their email address, but it does have the order date and order total. It is the order total that is the amount that would have been paid by either PayPal or credit card. There is a clear-cut description of what the items were. As such the substantiation requirements are satisfied and although not in perfect terms of what would have been expected before people started buying things on the internet, there is the basic information required by the Act to achieve substantiation.

   ·The box splitter and splitter hub were required for the Applicant to do his job properly.

   ·It is obvious to anyone who has been at sea that polaroid sunglasses are required to cut through the glare and be able to see clearly things that are in the water. They were necessary to do his watch duties properly.

   ·The Applicant decided that the fitness equipment was needed to do his job properly and the fact that he was not reimbursed for those items does not preclude deductibility. It was confirmed by Lieutenant NR McGuire that the Applicant did purchase the gym equipment for use by the ships’ company and was not reimbursed. Due to the exposure of the equipment it had a limited life of less than 12 months and was immediately deductible.

   ·The Applicant’s Military Fitness Leader duties is an essential part of his role.

   [36]    Transcript, pages 72-77 and 87.

   Penalties

6. In relation to the issue of penalties, the Applicant contended that should his claims for work related clothing expenses and other work related expenses be unsuccessful, that the shortfall penalties relating to these items should be remitted on the basis that he had a reasonably arguable position for both.[37]

   [37]    Exhibit 2, Applicant’s Statement of Issues, Facts and Contentions, page 4.

7. At Hearing the Applicant’s representative told the Tribunal that the shortfall penalty in relation to the other claimed deductions which were disallowed by the Respondent and which are not being argued before the Tribunal were not being disputed.[38]

   [38]    Transcript, page 75.

   Respondent’s Contentions

8. The Respondent provided an outline of arguments[39] prior to the Hearing of which he sought to rely on together with the contentions advanced at the Hearing.[40]

   [39]    Exhibit 6, Respondent’s Outline of Argument, provided on 2 April 2020, pages 1-30.

   [40]    Transcript, pages 78-87.

   Work related clothing expenses

9. The Respondent contended that the items being claimed at D3 Work related clothing expenses suffer from a defect in terms of their entitlement under section 8-1 of the ITAA 1997. The Respondent submitted that:[41]

   ·The only evidence before the Tribunal is the Glendinnings Report, there is no identification of what items the expenditure detailed in that report relate to.

   ·The Applicant was unable to provide those details at Hearing, he was only able to provide an array of items, he could not identify a particular amount against a particular item.

   ·According to Payne’s case, a decision of the High Court, identification of the loss or outgoing is required. The High Court provided at [7]: “Under the first limb of s51(1), outgoings incurred in gaining or producing the assessable income … are deductable. The sub-section requires the identification of a loss or outgoing ….”.

   ·A loss or outgoing has not been proven as the Applicant has not provided any documentary evidence or oral evidence that would enable the Tribunal to say a particular invoice represents a particular item of clothing, for example boots.

   ·If you cannot identify an item, you cannot say that it was incurred, something was incurred, that is clear from the print-out that items were purchased, but you cannot say in respect of a particular item that has been put forward by the Applicant was incurred because he cannot identify the item.

   ·If the Applicant cannot identify the item, it is equally impossible, in respect to the D3 claims to establish that it was incurred in the course of or what nexus it has to his duties.

   ·If those items were, for example T-shirts or grey shirts they would be conventional items that would have no nexus with the performance of the Applicant’s day-to-day duties as an Electronics Technician in the Navy. They are just conventional items that any workman might wear, they get dirty, you have other ones.

   ·The crucial submission here is that you cannot identify the items.

   [41]    Transcript, pages 79-80.

   Other work related expenses

10. The Respondent contended that while the items being claimed at D5 Other work related expenses can be identified, hence meeting the requirements in Payne’s case, the difficulty is around the fact of whether they were incurred and had a nexus with the gaining or producing of the Applicant’s income. The Respondent submitted that:[42]

    [42]    Transcript, pages 81-86.

    ·The evidence provided in relation to these items do not indicate in terms of what incurred means, as in to have been fully committed as per the James Flood New Zealand Flax case.

    ·There is no indication that there was any outgoing, what is presented is an order. The fact that you had an order, and the way the document is pasted together, it could be anything. What you would expect with an online purchase like these, to show the expense was incurred would be to see an outgoing and if that was all done online then it would be shown in bank statements or for there to be an electronic receipt or acknowledgement of order, but here there is nothing.

    ·It is not enough that an expense or outgoing has a relationship or a remote nexus, as per the High Court in Day’s case at [19].

    ·In relation to items 1 and 2 (the box splitter and splitter hub) the evidence of the Applicant indicates that he rather than the Navy, made the decision to purchase the items. The requirements as laid down by the High Court is something of a close and immediate connection to his duties and those duties, in this particular case, as an Electronics Technician. As an Electronics Technician, the Applicant provides a service and he fixes things, he is not required to buy nor supply the Navy’s supply chain as to items required.

    ·The evidence of Lieutenant NR McGuire was that the tools of the Navy are provided by the Navy and in the unusual circumstances that something is not available a member may purchase an item if authorised and be reimbursed for it. The Applicant’s evidence was that he sought reimbursement, but he was not reimbursed. This suggest that the Applicant was exercising his own discretion for the benefit of the Navy but not on derivation of his own assessable income. This is close to what happened in the cases of Little and Staker.

    ·The polarised lenses are for bridge watching exercises and when having regard to the authorities such as the Morris case, the reason that deductions are allowed for polarised lenses and sunglasses is because they have an additional quality of protection. In this particular case there is no evidence from the Applicant that was the case. There is no doubt that in some peoples mind they assist, however they were not generally required because they are not protective, there is no harm that is going to be occasioned and really it is obviously just the Applicant’s subjective opinion as to whether they do or do not assist.

    ·Goldberg J in Morris said:

    …the distinction is determined by asking whether the relevant work of the taxpayer which must be carried out in order to gain or produce assessable income is to be carried out in conditions which expose the taxpayer to factors such as the ultraviolet rays of a solarium, the heat, flames and sparks from a blast furnace or the harmful rays and ultraviolet radiation from the sun. If the answer to this question is in the affirmative, then the expenditure on items such as sun protection items used and applied during the undertaking of the work will not be expenditure of a private nature but will rather be expenditure relevant and incidental, and with a sufficient nexus, to the gaining or producing of assessable income.

    Factually that is not the case here.

    ·The Applicant asked that his evidence be accepted over that of Lieutenant NR McGuire as to whether the tablet was a requirement to perform his duties, the evidence of Lieutenant NR McGuire should be preferred as he is an independent appropriately authorised representative of the Navy to answer these questions, as opposed to the Applicant who it may be submitted has a self-serving purpose of putting those statements forward.

    ·The fitness or gym equipment was only used on HMAS Larrakia and the Applicant could not recollect whether he was on board for four or 13 weeks.

    ·The Applicant is paid as an Electronics Technician not as a Military Fitness Leader, he receives an allowance of approximately $2,000 per annum as a service allowance however so do many other individuals, the service allowance based on the evidence of Lieutenant McGuire is that this allowance can cover a variety of items.

    ·If it was the case that the Applicant’s duties do include that of a Military Fitness Leader, the duties of a Military Fitness Leader do not require the purchase of $1,500 worth of gym equipment. What seems to have happened is that there was no such equipment on board the ship so out of the generosity of his own heart, the Applicant purchased the equipment to the advantage of not only himself, but also the other crew members.

    ·Again, what was said in the cases of Staker and Little, apply in that the Applicant purchased the equipment not to benefit his own derivation of assessable income, he would have still been paid his income had he not purchased the equipment. The Applicant’s evidence was that at no other stage, or at least that he could recollect, had he purchased that gym equipment other than in respect of the HMAS Larrakia. There is an anomaly therefore that arises in the Applicant’s evidence - that in relation to the four to 14 weeks on the Larrakia, the purchase of equipment was somehow essential to his role as a Military Fitness Leader, and thereafter it was not.

    ·In addition, and if for no other reason the claim should be rejected for the gym equipment on the basis that is stated in TR95/17 at paragraphs 111 to 119A. It is based on the authority that gym fees, other fitness expenses are private expenses and cannot be claimed as a deduction. This is generally the case even if they are required to maintain a level of fitness in their employment.

    ·The Applicant has not discharged his onus to establish that he was entitled under section 8-1 of the ITAA 1997 to claim the deductions in dispute.

    Substantiation requirements

1. The Respondent contended that even had the Applicant established an entitlement in respect of the claimed expenses under D3 and D5 the Applicant has not complied with the substantiation provisions.[43]

   [43]    Transcript, page 85.

2. In response to the Applicant’s representative’s submission that the Respondent has discretion in this regard which should be exercised because of the nature and quality of the evidence, the Respondent referred to the authority in the Sanchez and Bhatti cases which make it clear that the substantiation requirement is strict. The Respondent referred the Tribunal to the point made by Senior Member Dunne in the Sanchez case that: “If the deduction is sought, the substantiation requirement must be met.”[44]

   [44]    Transcript, pages 85-86.

3. The Respondent contended that the discretionary element under section 900-195 of the ITAA 1997 has not been met as it is their submission that the preconditions have not been satisfied in terms of the entitlement under section 8-1 of the ITAA 1997, but more to the point, relief would not be available where there is no supporting documentation or factual material evidencing the expense to begin with. This discretion only applies where there is already in existence some supporting documentation which may be deficient. In the present case there is no supporting documentation in respect of the D3 claims, there is a dim print out from 2018, after the event, and no contemporaneous documentation to show the calculation of the D3 figures. The evidence of the D5 claims is a montage of a cut and paste from the internet, it does not satisfy the requirements of documentation which may be deficient. The Respondent contends there is simply no documentation in respect of which the discretion could be exercised.[45]

   [45]    Transcript, pages 85-86.

4. The Respondent contended that if the Tribunal accepts its submission in regard to the lack of entitlement, then it follows that there will have been a false and misleading statement because there was no entitlement to claim the deductions. The Respondent contended that when considering the shortfall arising from the initial assessment and the quantum of disallowed deductions, any position that the Applicant may have had in relation to having a reasonably arguable position is negated.[46]

   [46]    Transcript, page 86.

   Penalties

5. The Respondent contended that section 284-75(6) of Schedule 1 of the TAA 1953 does not apply.[47]

   [47]    Transcript, page 86;

6. The Respondent contended that while the discretion to remit an administrative penalty in whole or part under section 298-20 of Schedule 1 to the TAA 1953 is unconfined, such a discretion must be exercised for a proper purpose, in accordance with the objects of the TAA 1953 and according to law. There must be proper grounds giving rise to the remission.[48]

   [48]    Exhibit 6, Respondent’s Outline of Argument, provided on 2 April 2020, page 29.

7. The Respondent drew the Tribunal’s attention to the standard for remission of penalty[49] as stated by Griffiths J in Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation [2013] FCAFC 50; (2013) 212 FCR 483 at [249]:

   In my opinion, the correct question which arises under s298-20 should not be expressed in terms of “harshness”. Rather, the question is simply whether the decision-maker is satisfied having regard to the taxpayer’s particular circumstances that it is appropriate to remit penalty in whole or in part. For example, a decision-maker might determine that it is appropriate to remit penalty in whole or in part because otherwise the outcome for a particular taxpayer would be unreasonable or unjust (and therefore inappropriate), as opposed to harsh.

   [49]    Exhibit 6, Respondent’s Outline of Argument, provided on 2 April 2020, page 29.

8. The Respondent contended that there is no evidence that demonstrates that a favourable exercise of the remission of a shortfall penalty is warranted and it should in fact not be exercised as the:[50]

   ·Applicant failed to produce supporting documentation that would substantiate his entitlement to deductions under section 8-1 of the ITAA 1997 and his contentions as to the identity and amounts of the expenditure claimed have evolved significantly.

   ·Imposition of such penalties have arisen in consequence of the Applicant or his tax agent’s actions and represent a statutorily imposed consequence of his actions. This could not be said to be a harsh or unjust result, but a mechanism imposed by Parliament for taxpayers to comply with their taxation obligations.

   ·Applicant has not produced any circumstance or sufficient evidence of such circumstance to demonstrate that the imposition of penalty arising from the amended assessment as being harsh or producing an unjust, inappropriate or unreasonable outcome.

   [50]    Exhibit 6, Respondent’s Outline of Argument, provided on 2 April 2020, page 29.

   CONSIDERATION

9. Firstly, the Tribunal acknowledges the Applicant’s frustration at the Hearing in relation to the Respondent’s references to his position in the Navy and what that role brings with it in addition to his rank, role title and particular postings. The Tribunal accepts that part of being a Petty Officer or Leading Seaman (or any other rank for that matter) of the Royal Australian Navy a person is a Sailor first and then they perform the role or job for which they enlisted.  The Tribunal understands that this means that in addition his role as an Electronics Technician the Applicant also performed a number of other ancillary duties as required and in accordance with his training. The Tribunal accepts that one such ancillary duty was that of Military Fitness Leader.

10. The difficulty for the Applicant in this matter is that the onus lies with him to establish that the amended assessment was incorrect and what it should have been – which means he must prove that he was entitled to claim the disputed deductions.

11. The Tribunal does not doubt that in the 2017 year the Applicant purchased items of clothing that formed part of his Navy uniform or that such purchases were in line with the relevant uniform instructions or that the Applicant purchased the items that make up the disputed D5 claim for other work related expenses to use while performing his duties. However, for a loss or outgoing to be deductible the requirements of section 8-1 of the ITAA 1997 must be met and such losses or outgoings must be substantiated in accordance with Division 900 of the ITAA 1997.

12. In considering the disputed D3 work related clothing claim the Applicant’s evidence is clear.  The Applicant could not provide details in relation to the individual invoice amounts provided in the Glendinnings Report, nor could he with any certainty provide details of what items were purchased or their relevant cost so as to attempt to reconstruct what the particular invoice may relate to. The Applicant provided details of a number of different items he had to purchase that forms part of his uniform and told the Tribunal that he did not recall purchasing any item from Glendinnings that was not specific to his uniform and the uniform instructions. The Applicant sought to rely on the fact that Glendinnings specialised in naval uniforms that conformed with Navy regulations to indicate that his purchases would have related to such items.

13. The precedents set by previous Court decisions as set out above make it clear that in order to consider whether a loss or outgoing is incurred in gaining or producing a taxpayers assessible income you must first be able to identify that a loss or outgoing was made and to what such a loss or outgoing related. In the absence of such information it is impossible to determine whether a nexus exists between the expenditure and gaining or producing of income.

14. In this case the Tribunal accepts that the Applicant made purchases from Glendinnings, which were invoiced and that he paid his account. The Tribunal has no evidence before it however as to what those purchases relate to and as such can not assess the nexus of each invoice to the gaining or producing of the Applicant’s assessable income. There is no evidence before the Tribunal to make any form of assessments like those made in the Mansfield case.

15. The Tribunal notes that Glendinnings did sell items that would not constitute work clothing and further based on the quantum of possible purchases to which the invoices could relate, the amount being claimed does not in any way marry up to what the Applicant was alluding to having to spend. The issue is that the Tribunal simply does not know what the amounts being claimed by the Applicant in relation to D3 are.

16. As such the Tribunal is not satisfied that the Applicant has discharged his onus of proof in relation to the deductibility pursuant to section 8-1 of the ITAA 1997 of the disputed amounts relating to work related clothing that he was seeking to claim at D3.

17. Consequently, it is not necessary for the Tribunal to further consider the substantiation of the Applicant’s claimed work related clothing deductions pursuant to Division 900 of the ITAA 1997 as the Tribunal is not satisfied that it constitutes a work expense that qualifies as a deduction.

18. In considering the disputed D5 other work related expenses it is clear on the Applicant’s evidence what each item is and what it was used for. Given the documentary evidence supplied consists of a montage of cut and paste (most from eBay) orders there is no clear evidence such amounts were paid and that the goods were received by the Applicant. Whilst the Tribunal would expect that such documentation could have been provided either from confirmation emails or receipts provided within eBay, the Tribunal on this occasion accepts the Applicant’s evidence that the outlined amounts were in fact incurred.

19. In accepting that items were incurred, the Tribunal makes reference to the fact that the majority of the amount in question relates to gym/fitness equipment of which Lieutenant NR McGuire confirmed had been purchased and taken aboard HMAS Larrakia by the Applicant.

20. The fact that a loss or outgoing has a relationship to a taxpayers employment or the carrying out of their duties is not enough. As provided by the High Court in Payne the question is “whether the outgoing was incurred in the course of gaining or producing actual or expected income.  That is, is the occasion of the outgoing found in whatever is productive of actual or expected income?”

21. The Tribunal accepts that the duties under taken by the Applicant extend beyond that of those associated with his role as an Electronics Technician. Based on the evidence before it, the Tribunal accepts that the nine items in dispute relating to the D5 claim for other work related expenses may have been used by the Applicant in carrying out his duties and that he may have precured them for such purposes. The question though is whether the outgoings related to the purchase of these items were incurred in the course of producing the Applicant’s assessible income. It is this point that is in contention. The Applicant contended that it was necessary for him to purchase the 9 items in order to be able to perform his duties and that they were a requirement, whereas the Respondent contends that they were purchased at the Applicant’s discretion not at the direction of or requirement of the Navy.

22. The evidence of Lieutenant NR McGuire provided on behalf of the Department of Defence makes it clear that in the normal course of events the Applicant would not have to expend significant funds on ‘other expenses’. He provided that all tools should be provided by the ADF and that in the unusual although occasional event that equipment/tools are required to be purchased by the ship, the member would be reimbursed the cost if it was approved. He said this was referred to as ‘locally purchasing’.

23. Lieutenant NR McGuire indicated that there was no requirement for the Applicant to purchase gym/fitness equipment to carry out his role as a Military Fitness Leader, however, did acknowledge that the Applicant had purchased such equipment. He was however, unaware of the particular details of the purchases. Further Lieutenant NR McGuire provided that a tablet was not required by the Navy.

24. In giving his evidence the Applicant disagreed and told the Tribunal that he had discussed the purchase of the box splitter and splitter hub and gym/fitness equipment with the appropriate commanding officer, however that these purchases were not reimbursed due to budgetary issues and he subsequently sought tax deductions for the items. When put to him that he made these purchases at his discretion not at the direction of the Navy, the Applicant in essence agreed, however indicated that it was his discretion as part of carrying out his associated roles as a member of the Navy. The Applicant told the Tribunal that the box splitter and splitter hub were necessary to improve the entertainment systems onboard and that the purchased gym/fitness equipment was necessary in order to fulfil his role as Military Fitness Leader onboard HMAS Larrakia. The Applicant confirmed that he left the equipment onboard at the end of his tour of duty on HMAS Larrakia for use by the next crew as due to conditions it would not have been feasible to remove it.

25. The Respondent contended that the outgoings incurred by the Applicant in relation to the box splitter, splitter hub and gym/fitness equipment, relying on the evidence of Lieutenant NR McGuire and that provided by the Applicant at Hearing, was incurred in him exercising his own discretion for the benefit of the Navy but not in the derivation of his own assessable income.

26. In considering the evidence before it the Tribunal is not satisfied that a sufficient nexus exists between the Applicant’s purchase of the box splitter, splitter hub and gym/fitness equipment to establish that the outgoing was in fact incurred in the gaining or producing of his assessible income for the purposes of section 8-1 of the ITAA 1997.

27. There is no evidence before the Tribunal that the Applicant would not have continued to be paid in relation to his duties (be that his salary or allowances) if he had not purchased and supplied these items. While there is little doubt these items may have assisted the Applicant to better perform his duties, he was provided with the equipment that his employer considered was required to perform his duties. Similarly, to the findings in Little and Staker the Tribunal considers the Applicant’s expenditure in relation to these items, was more akin to providing a benefit to the Navy and his fellow sailors rather than being incurred in the course of producing his assessible income.   

28. The Applicant told the Tribunal that the tablet was necessary to store books and other things he required access to and that the he needed the scientific calculator in performing his duties as an Electronics Technician. There is limited evidence in relation to how these two items are productive of the actual income being or expected to be derived by the Applicant. As such in considering the evidence as a whole the Tribunal is not satisfied that the Applicant’s outgoing in relation to these items can be considered to have been incurred in the gaining or producing of his assessible income pursuant to section 8-1 of the ITAA 1997.[51]

    [51]    The Tribunal has also considered the deductibility of this item pursuant to section 45-25 of the ITAA       1997. The Tribunal finds that no deduction arises as it is not satisfied that the Applicant has established     that the tablet was purchased and used for a taxable purchase during the 2017 year.

29. The Applicant explained to the Tribunal that polarised lenses for his sunglasses were essential to ensure he can see things in the water while on watch and as such they were necessary to ensure he could adequately carry out this duty. The Tribunal appreciates the beneficial nature of polarised glasses when out on the sea. However when considering that the evidence before it, that equipment required is provided by the Navy and as such some people are provided with polarised glasses to use and authorities (particularly the decision in Morris) in relation to the deductibility of sunglasses, the Tribunal is not satisfied that the outgoing in relation to the polarised lenses was incurred in gaining or producing the Applicant’s assessable income pursuant to section 8-1 of the ITAA 1997.

30. The Tribunal is not satisfied that the Applicant has discharged his onus of proof in relation to the deductibility, pursuant to section 8-1 of the ITAA 1997 of the disputed amounts relating to the other work related expense that he was seeking to claim at D5.

31. Again, consequently, it is not necessary for the Tribunal to further consider the substantiation of the Applicant’s claimed other work related expense deductions pursuant to Division 900 of the ITAA 1997 as the Tribunal is not satisfied that they constitutes a work expense that qualifies as a deduction.

32. However for completeness the Tribunal notes in considering the evidence before it and the legislative requirements and precedents set out above it is not satisfied that the Applicant met the substantiation requirements of Division 900 of the ITAA 1997 in relation to his D3 and D5 claims and on the basis of the quality of evidence provided by the Applicant it would have been inappropriate for the discretion in section 900-195 of the ITAA 1997 to be exercised. Further the Applicant’s contentions in relation to the operation of section 900-200 of the ITAA 1997 are not accepted by the Tribunal on the basis that his evidence was that he had never had the relevant documents, as such the Tribunal finds they could not have been lost.

33. In relation to the imposition of the administrative penalty there is no evidence before the Tribunal to suggest that it was improperly imposed. As the Tribunal has found that the disputed deductions were not available to the Applicant, it necessarily equates to a finding that the Applicant made a false and misleading statement when lodging his income tax return for the 2017 year because there was no entitlement to claim the deductions outlined in that return.

34. The Applicant contends that the shortfall penalty insofar as it relates to disputes amounts being claimed at D3 and D5 should be remitted on the basis that he had a reasonably arguable position in relation to these claims. The Tribunal notes that the Applicant did not progress any evidence or make any contentions seeking relief as a result of the actions of his tax agent or that the imposition or subsequently a resulting refusal to remit the shortfall penalty was harsh or produced an unjust, inappropriate or unreasonable outcome.

35. The Tribunal does not accept the Applicant’s contention that he had a reasonably arguable position in relation to the disputed claims given that the evidence before the Tribunal demonstrates he did not keep and as such failed to produce supporting documentation for the claimed deductions, further the quantum of amounts being claimed particularly in relation to other work related expenses changed significantly.

36. As the Applicant was only disputing the imposition of the shortfall penalty as it relates to the claimed deductions being disputed before the Tribunal, and based on the evidence before it, the Tribunal does not consider it appropriate to exercise the discretion of section 298-20 of Schedule 1 to the TAA 1953 to remit all or part of the penalty.

    CONCLUSION

37. For the reasons set out above, the Tribunal is not satisfied for the purposes of section 8-1 of the ITAA 1997, that the amounts in dispute being claimed by the Applicant in relation to D3 – Work related clothing and D5 – Other work related expenses were incurred in gaining or producing his assessible income during the 2017 year.

38. The Tribunal, consequently, finds, that the Applicant has not discharged his onus to prove that the amended assessment for the 2017 year is excessive or otherwise incorrect.

1. The Tribunal finds that the administrative penalty imposed pursuant to sections 284-75(1) of Schedule 1 to the TAA 1953 was correctly imposed. The Applicant has not persuaded the Tribunal that the discretion in section 298-20 of Schedule 1 to the TAA 1953 in relation to the remission of the administrative penalty should be exercised.

2. Accordingly, the decision under review is affirmed.

I certify that the preceding 114 (one hundred and fourteen) paragraphs are a true copy of the reasons for the decision herein of Member D Mitchell

................[SGD].................................................

Associate

Dated: 12 November 2020

Date of hearing:

3 April 2020

Representative for the Applicant:

Mr J Woodward

John Woodward Chartered Accountants

Counsel for the Respondent:

Mr K O’Seighin

Solicitors for the Respondent:

Australian Taxation Office