Masters and Commissioner of Taxation (Taxation)
[2017] AATA 1042
•30 June 2017
Masters and Commissioner of Taxation (Taxation) [2017] AATA 1042 (30 June 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s):2015/5415
Re:Mr Masters
APPLICANT
Commissioner of TaxationAnd
RESPONDENT
DECISION
Tribunal:Ms G Lazanas, Senior Member
Date:30 June 2017
Place:Sydney
The Tribunal decides that the objection decision of the Respondent in relation to the income tax assessment for the year ended 30 June 2012 is set aside and the matter is remitted to the Respondent to issue an assessment in accordance with the Tribunal’s reasons.
The Tribunal affirms the objection decision with respect to the rate of administrative penalty.
.................................[sgd].....................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION AND REVENUE – income tax – deductions – employee – work-related motor vehicle expenses – work-related travel expenses – self-education expenses – other work-related expenses – objection decision relating to income tax set aside and matter remitted to Commissioner – administrative penalty – whether failure to take reasonable care – question of remission – objection decision relating to administrative penalty affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 8-1, 25-100, 28-90, 28-100, 28-105, 28-110, 28-115, 28-120, 28-125, 28-135, 28-140, 900-15, 900-30, 900-105, 900-110, 900-115
Income Tax Assessment Act 1936 (Cth) s 82ATaxation Administration Act 1953 (Cth) s 14ZZK, Sch 1 ss 284-75, 284-90, 298-20
CASES
Commissioner of Taxation v Finn (1961) 106 CLR 60
Commissioner of Taxation v Hatchett (1971) 125 CLR 494
Commissioner of Taxation v Payne (2001) 202 CLR 93
Federal Commissioner of Taxation v Studdert 91 ATC 5006
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
John Holland Group Pty Ltd & Anor v Federal Commissioner of Taxation (2015) 232 FCR 59
Lunney & Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478
Re Ting and Federal Commissioner of Taxation [2015] AATA 166
Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47REASONS FOR DECISION
Ms G Lazanas, Senior Member
30June 2017
INTRODUCTION
The applicant is referred to throughout this decision by the pseudonym ‘Mr Masters’ as a confidentiality order was made to prohibit the publication of his name and other information, including the name of his employer. Mr Masters is in dispute with the Commissioner of Taxation with respect to an amended assessment issued to him, following an audit of his income tax return for the year ended 30 June 2012 (the relevant year). The dispute is about deductions claimed by Mr Masters in respect of work-related motor vehicle expenses, work-related travel expenses, self-education expenses and other work-related expenses. The Commissioner disallowed these deductions and also issued him with an assessment of administrative penalty at the rate of 25% of the tax shortfall for failure to take reasonable care with respect to compliance with taxation laws.
Mr Masters objected to the amended assessment and to the assessment of penalty. The Commissioner allowed the objection in relation to income tax in part by allowing a few of the deductions. Prior to and at the hearing, both the Commissioner and Mr Masters made further concessions narrowing the issues for determination by the Tribunal.
The question for the Tribunal is whether the Commissioner’s objection decisions are correct. Mr Masters bears the onus of proof, that is, he must demonstrate on the balance of probabilities that the amended assessment of income tax issued to him by the Commissioner for the relevant year is excessive and, in relation to the assessment of penalty, that the decision should not have been made or should have been made differently.[1] I have decided to allow some deductions claimed by Mr Masters still in dispute, but not all of them, for the reasons set out below. I agree with the Commissioner’s decisions regarding penalties.
[1] s 14ZZK(b) of the Taxation Administration Act 1953 (TAA).
THE FACTUAL BACKGROUND AND EVIDENCE
The following findings of fact are based on the T-Documents and the evidence of Mr Masters, including his affidavit sworn on 15 July 2016 and his oral evidence at the hearing. Mr Richard Thompson, a person with over 25 years’ experience and a principal of a management consultancy firm that provides services in the areas of sourcing, procuring and vendor management to a range of Australian businesses, also gave evidence on behalf of Mr Masters. It is convenient to briefly deal with Mr Thompson’s evidence at the outset.
Mr Thompson holds a Masters Degree in Business Law from Monash University. Mr Thompson’s evidence was in the form of an expert opinion on the relevance between a law degree and the nature of work in the Vendor Relationship Management field, being also Mr Masters’ field of work. He stated that a Vendor Relationship Manager is tasked with managing, amongst other things, the contractual and commercial engagement of vendors and typically includes activities relating to contract management, variation management, pricing review negotiations, dispute resolution, governance and periodic risk reviews of the vendors. He said that a law degree empowers a Vendor Relationship Manager to deal with more complex vendor engagements, especially in highly regulated industries such as finance, telecommunications and construction. I accept what Mr Thompson said because of his extensive experience. It also accords with my own understanding of the relevance and utility of legal studies.
During the relevant year, Mr Masters was employed as a Vendor Relationship Manager at a company that provides infrastructure management services to government and corporate clients in the utilities, resources and building industries, amongst others, throughout Australia and New Zealand and in the Asia Pacific region (the company). Mr Masters started working with the company in or about April 2009 and worked there for approximately three years before taking up a more senior commercial manager role elsewhere.
He said, and I accept, that his duties at the company in the relevant year included managing commercial vendors in day-to-day operational matters as well as developing strategic relationships with them through contract negotiations, mediation, and resolution of disputes.[2] He said that he worked under the supervision of the company’s Chief Information Officer (CIO) and that he was primarily responsible for the technology vendors such as Microsoft, HP, Dell and IBM. He had a background in information technology, having graduated with a Bachelor of Computer Science degree (as well as a Bachelor of Arts degree) from the University of New South Wales (UNSW). He said he had worked at UNSW, initially on a part-time and, later, on a full-time basis, as a procurement officer for the university’s supplies, during and after completing his tertiary studies there.
[2] Applicant’s Statement of Facts, Issues and Contentions filed with Tribunal on 15 July 2016.
Mr Masters stated that in or about September 2010, he sought the advice of the CIO about appropriate further education that he should undertake to improve his skills to better perform his duties at the company. Mr Masters said that the CIO recommended that he should speak to the General Manager of Procurement at the company, which Mr Masters says he did. Mr Masters stated that the company’s General Manager of Procurement advised him to investigate legal training courses as that was the most relevant in terms of skills for procurement and vendor management because of the number of contractual issues and disputes that emerged in their line of work. Mr Masters produced contemporaneous email correspondence with various dates in September 2010 between him and the CIO with the subject heading “Further Studies” which corroborate this version of events and, accordingly, I find that these events happened, as recounted by Mr Masters. Additionally, the emails confirm that Mr Masters sought financial support from the company for undertaking a law degree. Relevantly, the email sent by Mr Masters to the CIO dated 28 September 2010 states:
I have done my research and the most suitable course would be a Juris Doctor (Postgrad Law Degree) at UTS. The other universities don’t offer night classes. I have spoken to Verica and she has given me the forms to apply for funding. It is a three-year degree at approximately $20k per annum. I would really only consider it if [the company] was able to assist with the fees.
The CIO replied on 19 October 2010, as follows:
I have spoken to Finance and we have already exhausted our L&D [Learning & Development] budget for this FY. I think it is a great idea nonetheless and can see how it would assist you in your work. I am happy to assist you with flexible working arrangements if you pursue the course. The additional skills will be taken into account in your next performance review and we can revisit funding next year.
The evidence of Mr Masters is that, at or about the same time, he sought advice from his accountant and tax agent, Mr Kevin Zerafa of Owen T Daniel & Co, as to whether he could claim a deduction for studying law and that he was advised that he could because the course was relevant to his role. Subsequently, Mr Masters enrolled in the Juris Doctor course at the University of Technology Sydney (UTS) and commenced his studies in March 2011. During the relevant year, Mr Masters studied the subjects of Criminal Law, Torts, Real Property, Commercial Law and Corporate Law. He said, and I accept, that the company supported him by allowing him to leave his workplace early to attend evening classes during university terms, and also allowed him study leave. In his income tax return for the relevant year, Mr Masters claimed deductions of $21,944 for self-education expenses.[3]
[3] T3-36.
Mr Masters also claimed a deduction of $36,079 for work-related car expenses.[4] He claimed to have calculated this amount on the basis of the logbook method. At the hearing, however, he was not certain as to how this amount had been calculated and, as explained further below, showed me two different spread sheets that he had prepared to try and reconcile his claim. Mr Masters said that he drove a Maserati vehicle from home to work, and to other work destinations such as clients’ premises, and back home. Additionally, during university terms, he said he drove his Maserati from work to university and then home. He said he was entitled to claim his car expenses as “work-related motor-vehicle expenses” or, alternatively, as “work-related self-education expenses”.
[4] T3-35.
The Commissioner’s counsel cross-examined Mr Masters about his Maserati. It emerged in cross-examination that the quote for the renewal of the compulsory third party insurance policy and, separately, the renewal notice for the car’s comprehensive insurance policy, contained statements which were inconsistent with his evidence. First, they revealed that the youngest driver’s date of birth was the year 1950 which Mr Masters said was the year his father was born.[5] This was contrary to the evidence of Mr Masters that he drove the Maserati daily. Secondly, the invoice for the comprehensive insurance policy was addressed to Mr Masters at an address in North Sydney which he volunteered was the address of an investment property, and not where he resided (in another suburb).[6] This also contradicted the evidence of Mr Masters about him driving his Maserati to and from his home. Mr Masters said his home address would have attracted a higher insurance premium which was why he put the North Sydney address for the comprehensive insurance policy. Significantly, this information, while unrelated to the issues in the tax dispute was, nevertheless, evidence which discredited Mr Masters and which I have considered in my analysis of the evidence regarding deductions claimed by him.
[5] T9-172 and Exhibit A5.
[6] T9-169 and Exhibit A5.
As to further support for the claims in relation to work-related motor vehicle expenses, Mr Masters said in his affidavit sworn on 15 July 2016, as follows:
My role involved visiting clients and vendors at sites and as such involved a significant amount of travel. I used my car (Registration XXX) to make these trips from site to site and as such had a significant portion of work related travel expenses.
Mr Masters also provided the Commissioner with a letter from the CIO on the company’s letterhead dated 19 April 2010 in which the CIO relevantly stated, as follows:
This letter is to certify that [Mr Masters] is employed by [the company] in the role of Vendor Relationship Manager. As part of the role, [Mr Masters] is required to visit external clients and vendors on a regular basis. The travel costs incurred are not reimbursed, as it is an expectation of the role and was not negotiated as part of [Mr Masters’] salary package.
Mr Masters also claimed a deduction for work-related travel expenses in the sum of $8,598.[7] This claim mostly related to a trip to the USA in the relevant year, where Mr Masters attended the “EMC Global conference” in Las Vegas and also met with representatives of Microsoft and Google at their respective campuses. He said, and I accept, that EMC was one of the key vendors that he was managing at that time and that the conference would showcase EMC’s new service offerings, which was key to his work. He said that no funding was provided by the company for him to attend the EMC Global conference but that the CIO was supportive of him attending if he was to fund the trip personally. Amongst the documents in evidence regarding the US trip are the invoices for flights, accommodation, car rental, Mr Masters’ diary entries and the itinerary for the EMC Global conference.
[7] T3-35.
Additionally, Mr Masters claimed a deduction for other work-related expenses in the sum of $8,371[8], the entirety of which was still in dispute at the hearing. This comprised claims for what were initially said to be home office and stationery expenses ($2,361) and depreciation for various equipment such as computers and mobile phones ($6,010) but later, for other items such as a Pinarello Dogma bicycle, helmet and Bose Quiet Comfort headphones.
[8] T3- 36.
In mid-June 2014, the Commissioner notified Mr Masters, care of Owen T Daniel & Co, that he had been selected for an income tax audit in relation to his work-related expenses and donations. (The donations were not in dispute by the time of the hearing and accepted by the Commissioner as deductible). Mr Masters said that he was made aware by that accounting firm that Mr Zerafa had “moved on” and that another accountant would be dealing with his matter. Mr Masters claims that the accountant tasked to deal with his matter told him that he had all the necessary documents on file, he had submitted them to the ATO and that there should not be a problem.
On 1 September 2014, the Commissioner again wrote to Mr Masters, care of Owen T Daniel & Co. The Commissioner stated that as he had not replied to the request for information, the audit would be completed based on the information available to the Commissioner. The Commissioner proceeded to disallow all the deductions and imposed a penalty of 25% of the tax shortfall. Mr Masters says that he contacted the accountant who seemed confused, as he had apparently submitted everything to the Commissioner. The accountant further advised that Mr Masters would need to lodge an objection.
On 9 September 2014, the Commissioner issued the Notice of Amended Assessment to Mr Masters.
On or about 6 November 2014, Mr Masters lodged an objection to the Notice of Amended Assessment with the assistance of another accounting firm, PPF Accounting Services Pty Ltd (PPF).
On 24 June 2015, PPF sent numerous documents to an officer at the Australian Taxation Office (ATO), including schedules showing the breakdown of the claims for certain categories of expenses, as follows, as well as some supporting invoices and other documents.[9]
[9] T-9, pages 156 -184.
Motor vehicle expensesExpenses Amount Repairs & Maintenance $3,275.04 Rego $899.00 Insurance $2,362.08 CTP $467.55 Depreciation $9,620.00 Petrol $7,254.00 Total $23,877.67 Self-education expenses
Subjects Amount Criminal Law & Torts $7,033.34 Real Property, Commercial Law, Corporate Law $10,257.50 Total $17,290.84 Other work-related expenses Item Amount Macbook Air $1,766.07 Bose-quiet comfort 3 HDPHN $599.00 Helmet $165.96 Total $2,531.03
It is noted that the sums referenced in [21] above did not correspond with the claims made by Mr Masters in his income tax return for the relevant year as set out in [10], [11], [15] and [16] above, which were substantially greater total amounts. Also, the information provided by PPF to the Commissioner was incomplete in that it did not address the claims by Mr Masters for the category of “other work-related travel expenses”.
On 25 June 2015, the Commissioner wrote to PPF requesting further information, including:
(a)a letter from Mr Masters’ employer that he was required to use his motor vehicle for work-related purposes throughout the financial year ended 30 June 2012;
(b)a valid logbook for the year ended 30 June 2012;
(c)a letter from Mr Masters’ employer confirming that he was required to undertake travel for work-related purposes throughout the financial year ended 30 June 2012;
(d)details in relation to the dates of the work-related travel, the destination and the purpose for which the travel was undertaken;
(e)an explanation of how the courses undertaken related to Mr Masters’ earning of assessable income.
On 8 July 2015, PPF replied to the Commissioner stating, relevantly, as follows:
With regards to Self Education Expenses, our client no longer works for [the company] and cannot obtain a letter from them for this reason.
Our clients duties whilst working for [the company] included Procurement and contract management. He reviewed contracts and negotiated Terms of contract and required a sound understanding of contract law. …his ability to understand and negotiate contracts was his main function. The degree is intended to improve the skills and knowledge necessary to carry out his earning activities. The attaining of a law degree would also lead to higher and better paying positions (either originally with [the company] or other employers) from the same earning activities.
In relation to travel expenses:
The travel was in relation to attending a conference in Las Vegas. See brochure attached. An email from the employer is attached giving authority for the client to attend, but also advising that no costs for accommodation and travel would be paid for by the employer.
There are also a couple of hire car receipts which related to the hire of cars whilst meeting with clients.
A number of documents were sent with that correspondence dated 8 July 2015 to the Commissioner, including a copy of an email from the CIO to Mr Masters dated 13 March 2012 in which the CIO stated, as follows:
Happy for you to go [to the EMC conference in the US] however as you are aware, there is no budget to cover flights or accommodation.
Another document provided was a summary of work-related travel expenses, as follows:
Work-related travel expenses Item Amount Avis Car rental $157.16 Avis Car rental $216.08 Avis Car rental $109.99 EMC World Conference $800.00 EMC World Conference $1,840.00 Total $3,123.23
It is noted that the total amount set out in [25] above did not correspond to the amount claimed by Mr Masters in his return, which again was substantially greater. Amongst the documents provided to the Commissioner was an invoice for Avis car hire in Los Angeles on 20 May 2012 in the amount of $252.11, which appears to have been incorrectly transcribed in the summary document as $109.99, (the number ‘109.99’ was in fact the mileage number)[10]. Also, there were two Avis car rental “estimates” for $157.16 and $216.08[11] in respect of car hire reservations in March and April 2012 for cars to be collected from Coolangatta Airport for weekend usage. I will say something more about these below.
[10] T11-203.
[11] T11-204 and T11-205.
On 3 August 2015, the Commissioner wrote to PPF, asking whether any further information would be provided by Mr Masters to support a deduction of $2,631 in relation to the home office and stationery expenses as well as $6,010 in relation to depreciation referred to as the claim for other work-related expenses.
On 17 August 2015, Mr Masters’ accountant replied attaching “a 2012 Depreciation schedule”[12] and noting that “the office equipment and MacBook were used solely for work purposes”. Mr Masters’ accountant also stated the equipment allowed Mr Masters “to work remotely and from home outside office hours”. The Depreciation Schedule listed four MacBook computers, four iPhones and three iPads, amongst other items.
[12] T13-219.
On 21 August 2015, the Commissioner issued Mr Masters with the Notice of Objection Decision, allowing a few of the deductions but disallowing the bulk of them. The Commissioner also did not change his views in relation to the penalties issues.
On 16 October 2015, Mr Masters lodged an Application for Review with the Tribunal for a review of the Commissioner’s objection decisions.
As noted at [11] above, at the hearing, Mr Masters produced two spread sheets – Exhibit A1 and Exhibit A2 – in which he itemised his claims for his various deductions. However, this attempt at reconciling the claims made in his return was unconvincing and unreliable because very few numbers matched what had been claimed in his tax return. For example, with reference to self-education expenses, the amount claimed by Mr Masters in his tax return was $21,944, however, Exhibit A1 showed a total of $22,814.76 while Exhibit A2 showed a total of $19,655.91. With reference to his claim for motor vehicle expenses, the amount claimed in his tax return was $36,079 but, according to Exhibit A1, the claim totaled $38,546.67 while Exhibit A2 showed the sum of $35,748.67, the major difference between the spread sheets on this issue being the depreciation figures and the interest and leasing costs for his Maserati vehicle. In relation to the category of other work-related expenses, Exhibit A1 showed a claim for depreciation expenses totaling the sum of $8,499 while Exhibit A2 showed the expenses in that category as totaling $8,122 and comprised of expenses entirely unrelated to depreciation, namely, for the purchase of a Pinarello Dogma bicycle ($3,379), bicycle helmet ($165), parking ($3,200) and tolls ($1,378), noting that parking and tolls were alternatively shown by Mr Masters in Exhibit A1 under “work-related self-education expenses”.
In summary, Exhibits A1 and A2 demonstrated that Mr Masters did not know precisely what he had claimed deductions for and under what labels in his income tax return. He said that he had to reverse engineer what his income tax return would have looked like. Additionally, Mr Masters was trying to prove the deductions claimed by putting his claims on alternative bases, because he was unclear about the calculations and the categories. He said he was in this dilemma because all his documents had been handed over to his former accountant for the preparation of his tax return. As it turns out, Mr Masters had some documents including relevant emails while working at the company during the relevant year but he did not have all the information and documents to prove all the deductions he had claimed, leaving him in a precarious position.
THE ISSUES BEFORE THE TRIBUNAL
The only substantive tax issues for the Tribunal to decide are whether Mr Masters is entitled to the deductions, as claimed in his tax return for the relevant year for:
(a)work-related motor vehicle expenses in the amount of $36,079;
(b)work-related travel expenses in the amount of $7,185:
(c)work-related self-education expenses in the amount of $21,944; and
(d)other work-related expenses in the amount of $8,371.
In addition, there is the issue of whether the administrative penalty imposed on Mr Masters for failure to take reasonable care was correct. If so, should the penalty be remitted?
LEGISLATIVE FRAMEWORK AND PRINCIPLES
The key taxation provisions relevant to this case are the general deductibility provisions as well as the specific legislative provisions regarding motor vehicle expenses and, in addition, the substantiation provisions for expense claims.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relevantly provides as follows:
8‑1 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) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
…
(b) it is a loss or outgoing of a private or domestic nature; or…
The issues in this case turn on s 8-1(1)(a) and whether a particular “loss or outgoing” was “incurred in gaining or producing ... assessable income”. Paragraph (b) of s 8-1(1) does not apply as Mr Masters was an employee. It is settled that the reference to “assessable income” in s 8-1(1)(a) is not confined to that of the income year in question, but extends to that of other years or that which the outgoing would be expected to produce.[13]
[13] Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at [16].
It is also well settled that incurred “in” gaining or producing means incurred “in the course of” gaining or producing assessable income. In Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 (Ronpibon), the High Court 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.
In Commissioner of Taxation v Payne (2001) 202 CLR 93 at [11], the High Court rephrased the issue in s 8-1(1)(a) of the ITAA 1997 as involving the following question:
is the occasion of the outgoing found in whatever is productive of actual or expected income?
In Ronpibon, the High Court also relevantly observed (at [59]) as follows in relation to the issue of apportionment when outgoings have a double aspect, that is, the outgoings are in part attributable to the gaining of assessable income and in part to some other end or activity:
It is perhaps desirable to remark that there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects.
With respect to outgoings incurred by a person travelling between their home and work, it is common ground that although that travel can be described as a “prerequisite” to earning income, on its own without more, that travel does not have the requisite connection with the earning of income.[14] That is, the occasion for the expenditure is not found in the activities of the taxpayer that are productive of his or her income. The situation would be different if, for example, an employee is required to travel as part of their employment.[15]
[14] Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478.
[15] John Holland Group Pty Ltd v Federal Commissioner of Taxation (2015) 232 FCR 59.
Section 25-100 of the ITAA 1997 sets out specific rules for the deductibility of expenses incurred on travel between workplaces and relevantly provides, as follows:
When a deduction is allowed
(1)If you are an individual, you can deduct a *transport expense to the extent that it is incurred in your *travel between workplaces.
Travel between workplaces
(2) Your travel between workplaces is travel directly between 2 places, to the extent that:
(a) while you were at the first place, you were:
(i) engaged in activities to gain or produce your assessable income; or
(ii) engaged in activities in the course of carrying on a *business for the purpose of gaining or producing your assessable income; and
(b) the purpose of your travel to the second place was to:
(i) engage in activities to gain or produce your assessable income; or
(ii) engage in activities in the course of carrying on a business for the purpose of gaining or producing your assessable income;
and you engaged in those activities while you were at the second place.
(3) Travel between 2 places is not travel between workplaces if one of the places you are travelling between is a place at which you reside.
Additionally, with respect to work-related motor vehicle expenses, Division 28 of the ITAA 1997 sets out the methods for working out deductions for car expenses if a taxpayer owns or leases a car. Mr Masters had elected to use the logbook method. Section 28-90 of the ITAA 1997 relevantly provides as follows in relation to the 2012 income year for claims made using the logbook method:
28-90 How to calculate your deduction
(1)To use the “log book” method, you multiply the amount of each *car expense by the *business use percentage.
The expense
(2)The expense must qualify as a deduction under some provision of this Act outside this Division (or would qualify if, while you *held the *car, you had used it only in producing your assessable income). If only part of the expense would qualify, you multiply that part by the *business use percentage.
Example: You borrow money to buy a car. You make repayments of principal and payments of interest.
You cannot deduct the repayments of principal because they are capital expenses.
The interest payments would be deductible in full if, throughout the income year, you had used the car only in producing your assessable income.
Using the “log book” method:
·if you held the car for the whole income year—multiply the interest payments by the business use percentage;
·if you held the car for only 6 months of the income year—multiply the interest payments for those 6 months by the business use percentage.
To find out whether an expense qualifies as a deduction under this Act, see Division 8 (Deductions).
The percentage
(3) The business use percentage is calculated by dividing:
the number of *business kilometres that the *car travelled in the period when you *held it during the income year;
by
the total number of kilometres that the car travelled in that period;
and expressing the result as a percentage.
(4) Business kilometres are kilometres the *car travelled in the course of:
(a) producing your assessable income; or
(b) your *travel between workplaces.
(5) You calculate the number of business kilometres by making a reasonable estimate. The estimate must take into account all relevant matters, including:
(a) any log books, odometer records or other records you have; and
(b) any variations in the pattern of use of the *car; and
(c) any changes in the number of cars you used in the course of producing your assessable income.
Under the log book method, in addition to keeping a log book[16] and documents for the purposes of the general car expense substantiation provisions under Subdivision 900-C of the ITAA 1997, the taxpayer must also keep odometer records.[17] Significantly, in terms of substantiating a claim using the log book method, s 28-100(4) provides that the taxpayer must record, before lodging their income tax return, his or her estimate of the number of business kilometres, as defined, and the business use percentage, as defined, unless the Commissioner allows the taxpayer to record this information later.
[16] ss 28-100(2), 28-105, 28-110, 28-115. 28-120 and 28-125.
[17] s 28-100(3) and ss 28-135 and 28-140.
Work-related expenses such as self-education expenses are general deductions and deductible under s 8-1 of the ITAA 1997 where the principles governing their deductibility are satisfied. The principles regarding the deductibility of self-education expenses are relatively straightforward, even though there is dispute over their application in this case. The principle is that expenses are deductible where the expenses have the necessary connection with the income earning activities of the taxpayer. For example, expenses on work-related courses for taxpayers keeping up to date and/or resulting in or likely to result in an increase in a taxpayer’s income from his or her current employment are ordinarily deductible. Similarly, expenses which may lead to promotion are also deductible. It is instructive to set out some of the cases on the deductibility of self-education expenses.
The leading decision is Commissioner of Taxation v Finn (1961) 106 CLR 60 (Finn), where the taxpayer, a senior design architect in the public works department of the State of Western Australia who went overseas to further his knowledge of architectural developments, was held to be entitled to claim certain costs of travelling abroad as self-education expenses. The Commissioner had accepted in that case that all the taxpayer’s activities abroad were devoted to architecture and its study and that Mr Finn made voluminous notes and kept photos but contested the issue of Mr Finn’s deductibility of expenses based on whether they were incurred in gaining or producing assessable income.
The following statement of Dixon CJ, with whom Kitto and Windeyer JJ each agreed, summarises the conclusions on the evidence in Finn and the requisite nexus of the learning outcomes to the taxpayer’s income producing activities:
From the facts that have been stated above three or four conclusions may be drawn which perhaps may be considered to govern the question whether the expenditure was incurred in gaining or producing the assessable income. In the first place it seems indisputable that the increased knowledge the taxpayer sought and obtained of his subject and the closer and more realistic acquaintance he secured of modern developments in design and construction made his advancement in the service more certain, and that in respect of promotion to a higher grade these things might prove decisive. This was put clearly by the Principal Architect, though in a letter written ex post facto, "I understand from you that the Commissioner now desires to know whether the experience obtained and the large amount of data collected will result in an increase in your income. To me, it is obvious that this must increase your professional efficiency, and hence your value to this Department, and must materially assist your future advancement to a higher position in the Department with consequent increase in income." In the second place, so far as motive or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. In the third place it is apparent that the heads of his Department, and indeed the Government itself, treated the use which he made of his long service and other leave to study architecture, increase his professional knowledge and study modern trends, as a matter not only of distinct advantage to his work for the State but of real importance in at least one project in hand. In the fourth place it was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service. He was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government. His journey abroad and what he did while in Europe, as well as in South America in the following year of income, was therefore in a correct sense incidental to his employment and most relevant to it.
Windeyer J in Finn sets out the relevant legal principles regarding the deductibility of expenses with respect to maintaining or increasing knowledge in a field of expertise in the following way:
a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion. Moreover, it would surely be wrong to assume that the Crown is so indifferent to the professional attainments of those whom it employs that their rights and prospects in its service are not affected by the true measure of those attainments. That was not so in this case. Outgoings incurred for the genuine purpose of acquiring or maintaining knowledge and skill in a vocation do not become an outgoing "of a private nature" simply because the taxpayer got pleasure and satisfaction in increasing his knowledge and attainments.
In Commissioner of Taxation v Hatchett (1971) 125 CLR 494, Menzies J held that a teacher was entitled to claim as deductions, expenses incurred in connection with the submission of theses for the purpose of gaining a teacher’s higher certificate as the certificate was expected to lead to an increase in earnings. His Honour held, however, that the expenses incurred by the teacher with respect to university fees for subjects in the Faculty of Arts were not deductible because there wasn’t a sufficient connection with the gaining of assessable income. His Honour stated as follows at [499]:
… the university fees were paid with the encouragement of the department; it contributed towards them. This, however, is not, of itself, enough to bring the fees within s 51 …
… I am not able to find any connexion between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department. In my opinion this general consideration is not enough to make the fees deductible; there must be a perceived connexion between the outgoing and assessable income.
In Federal Commissioner of Taxation vStuddert 91 ATC 5006, the taxpayer, a flight engineer, claimed a deduction for expenses incurred on light aircraft flying lessons leading to a private pilot's licence. Hill J of the Federal Court substantially agreed with the decision of the Tribunal that the lessons improved the taxpayer’s proficiency in his duties as a flight engineer. His Honour found that the expenses were relevant and incidental to the activities as flight engineer that directly produced Mr Studdert's income. This finding was based on the facts that undertaking the lessons made him better equipped to perform his skilled job and better proficiency was a motivation for undertaking the lessons. If necessary, his Honour would also have supported his decision with the finding that flying proficiency would assist Mr Studdert in promotion to higher grades in his current job.
In Re Ting and Federal Commissioner of Taxation [2015] AATA 166 (Re Ting), the taxpayer who was employed as a high school teacher of science and mathematics was unsuccessful in claiming deductions for university fees for studies in financial accounting and marketing subjects. The taxpayer’s motivation in undertaking part-time study for a Graduate Diploma of Business Administration at the University of Melbourne was to obtain a position as a leading teacher or school principal in the future. Deputy President Alpins concluded as follows:
[31] The course was not required as a condition of the applicant’s employment, nor was it required in order to fulfil his tasks and duties (cf Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 at 67, cited in Day at [33]). Furthermore, the evidence establishes that it would not bring about an increase in his income from his current employment (cf Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494 at 498). That required employment as a leading teacher.
[32] Given its nature, the course did not improve or maintain the applicant’s skills and knowledge as a teacher (cf. Finn); rather, it had the more general effect of increasing the likelihood of him being a better teacher, but that connection is too tenuous to make the course expenses deductible (Hatchett at 499).
[35] To the extent that the course would or might make the applicant more likely to obtain promotion to a position as a leading teacher, that does not make the applicant’s course expenses deductible. In that respect the expenses were “incurred in getting, not doing “work; the expenses preceded the relevant income-earning activity and came “at a point too soon to be properly regarded as incurred in gaining assessable income” (Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541 at 549; Commissioner of Taxation v Cooper (1991) 29 FCR 177 at 198 per Hill J). The same can be said insofar as the course does or might assist the applicant in eventually becoming a school principal.
Also, a taxpayer’s entitlement to a deduction under s 8-1 of the ITAA 1997 is subject to the operation of s 82A(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) which has the effect of reducing deductions in respect of self-education expenses by the amount of $250.
Turning to the substantiation requirements, Division 900 of the ITAA 1997 sets out the rules in respect of “work expenses” which are defined in s 900-30 to mean “a loss or outgoing you incur in producing your salary or wages”. Section 900-15 relevantly provides:
900‑15 Getting written evidence
(1)To deduct a *work expense:
(a) it must qualify as a deduction under some provision of this 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.
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...
Section 900-115 sets out a number of rules in relation to written evidence from a supplier, which covers any type of expense except the decline in value of a depreciating asset. Section 900-115 relevantly provides, 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.
…
IS MR MASTERS ENTITLED TO CLAIM DEDUCTIONS FOR WORK-RELATED MOTOR VEHICLE EXPENSES?
The Commissioner contended that Mr Masters has not discharged the burden of proof to show that he is entitled to a deduction for work-related motor vehicle expenses in the amount he claimed. The Commissioner says that Mr Masters has not been able to prove that he is the driver of the car for the relevant year (based on the information provided to the insurance company). The Commissioner also pointed to some expenses, such as the amount of ‘prestige annual fee’ included on the receipt for the registration of the car as not having been incurred in gaining or producing assessable income. Further, the Commissioner says that Mr Masters has not explained the calculation of the depreciation amount of $9,620 or the claim for petrol of $7,254.
I agree with the Commissioner that Mr Masters failed to discharge the burden of proof in relation to his claims for motor vehicle expenses. I was not satisfied based on the limited evidence before me that Mr Masters was required to travel as part of his employment in the relevant year and, therefore, I am not prepared to allow any claim for work-related car expenses. Mr Masters said he was required to travel to clients but I find that the log book he produced did not indicate he visited any clients. Specifically, the log book contained numerous entries for “trip to city” but no description of the purpose of travel to the city was offered, such as the names of any clients visited. In my view, to satisfy the requirement in s 28-125(2) of the ITAA 1997 of “why the journey was made”, it is necessary to describe the purpose of the visit. Mr Masters also failed to satisfy me that his travel constituted “travel between workplaces” under the terms of s 25-100(2) of the ITAA 1997 as he did not identify the workplaces.
The sole piece of independent evidence that Mr Masters produced was a letter from the CIO dated 19 April 2010 saying that he was “required to visit external clients and vendors”. The difficulties with this letter are that it was in respect of a different year of income and, additionally, it was not consistent with the log book entries Mr Masters had made in respect of the period in February to June 2012. That is, as explained in [57] above, no external clients or vendors were referenced in the log book. It follows, that I also find that Mr Masters’ travel between home and work did not have the requisite connection with the earning of income.[18]
[18] Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478.
My conclusion, that Mr Masters failed to discharge the burden of proof, is reinforced by the fact that Mr Masters was unable to point to any document which accurately recorded the calculation of the motor vehicle expenses claimed in his income tax return for the relevant year. As already noted at [31] above, Exhibits A1 and A2, which were tendered at the hearing, were “reverse engineered” by him based on the receipts he located and estimates he made including, for example, $140 per week “on average” for petrol costs resulting in a total claim of $7,254 for petrol. Mr Masters also adopted alternative bases for the motor vehicle expense claims, for example, he used differing depreciation amounts in Exhibits A1 and A2 and, furthermore, in Exhibit A1 (but not Exhibit A2), he claimed interest and lease costs regarding the Maserati vehicle. Most significantly, Mr Masters was uncertain as to how the claims were arrived at in the preparation of his income tax return and, although he tried, he could not reconcile the claims. Moreover, extrapolating from the receipts in evidence for repairs and maintenance, registration and insurance fees and the claims for deductions, it appeared Mr Masters claimed to be using his Maserati vehicle 100% of the time for work purposes. This was contrary to the log book, to the extent that was reliable, that referenced some private usage.
IS MR MASTERS ENTITLED TO CLAIM DEDUCTIONS FOR WORK-RELATED TRAVEL EXPENSES?
The Commissioner contended that Mr Masters is not entitled to a deduction of work-related travel expenses in the amount of $7,185 to which Mr Masters says he is entitled. Specifically, the Commissioner took issue with the fact that Mr Masters did not apportion the airfares and accommodation expenses on his US trip to take into account time not spent on income earning activities, namely, approximately 2.5 days out of an 11 day overseas trip. Also, according to the Commissioner, Mr Masters did not explain the calculation of the incidentals in relation to the USA trip and, in any event, Mr Masters should only be entitled to claim expenses for incidentals for the 8.5 days relating to work purposes.
At the hearing, the Commissioner accepted that Mr Masters had provided documents substantiating the international and domestic flights for the US trip but maintained that he was only entitled to claim part of the airfares, based on the number of days related to the EMC Global conference and other work meetings attended by Mr Masters. I find that Mr Masters is entitled to claim a deduction for the total airfare expenses ($3,580) on the basis that the outgoing was incurred in its entirety for him to travel to the US to attend the EMC global conference which I find was for work purposes. It is not appropriate, in my view, to apportion the airfares to treat part of them as deductible and part of them as not deductible. This is because the US trip was work related travel and the airfares are not able to be readily apportioned for any private purpose.
On the other hand, I find that the accommodation expenses claimed by Mr Masters for the US trip can and should be apportioned and that Mr Masters is only entitled to claim a deduction in his income tax return for the accommodation expenses relating to his stays for the work-related conference and meetings. The difference with the accommodation expenses is that they are charged separately, namely, as daily tariffs. It follows, Mr Masters is not entitled to claim deductions for accommodation expenses for days when Mr Masters was not attending to work matters. This approach is consistent with the principles in Ronpibon about apportioning expenses to the extent to which they are incurred in gaining or producing assessable income (see [40] above). In other words, an expense is required to be apportioned where it achieves a number of distinct purposes and a separate payment is, or could have been made, to achieve that distinct purpose. On the basis of the information before me, I find that Mr Masters is entitled to a deduction for $2,226 in accommodation expenses for the US trip. I have not allowed a deduction for 2 nights in San Francisco (namely, for $476) as I find those expenses were private expenses. In relation to incidentals claimed by Mr Masters, I am satisfied that Mr Masters is entitled to claim deductions in the sum of $2,070 based on 9 days relating to work purposes, calculated at the rate of $230 per day, with which rate the Commissioner agreed at the hearing.
The Commissioner accepted at the hearing that the Avis car hire costs in Los Angeles for were deductible in their entirety (see [26] above, noting that the amount should be $252.11). In relation to the car hire costs of $157.16 and $216.08 for trips in Queensland (see [26] above), I was not satisfied that these were work-related travel expenses and do not allow these deductions. Mr Masters did not provide any evidence as to the basis for claiming these expenses for weekend trips in Queensland as work-related travel expenses.
IS MR MASTERS ENTITLED TO CLAIM DEDUCTIONS FOR WORK-RELATED SELF-EDUCATION EXPENSES?
The Commissioner contended that Mr Masters is not entitled to a deduction of self-education expenses because he has not satisfactorily explained how both the degree of Juris Doctor and the individual subjects studied in the relevant year are related to the earning of his assessable income for the relevant year. The Commissioner submitted that the degree of Juris Doctor, in its entirety, is not relevant to the earning of Mr Masters’ assessable income. I disagree with the Commissioner’s viewpoint and am satisfied that Mr Masters is entitled to deductions for some of his work-related self-education expenses for the reasons set out below.
In terms of the issue of deductibility of expenditure for self-education, “the decision often will depend on the facts of the given case”.[19] I find that the facts here strongly support the position adopted by Mr Masters that his legal studies would improve his skills and proficiency as a Vendor Relationship Manager and lead to an increase in his income in future years. Mr Masters’ evidence, which I accept, was that he sought advice from his supervisor about how to improve his skills to better perform his duties at the company and, in turn, he later discussed with the company’s General Manager of Procurement, the utility of starting a legal training course. I have taken into account the contemporaneous correspondence confirming that Mr Masters sought financial support from his employer to undertake the postgraduate legal studies at UTS which lends credence to Mr Masters’ evidence that his objective was to improve his skills and knowledge, leading to an increase in his income from his current income-earning activities. The costs of increasing a person’s learning, knowledge and experience and ability in their profession are deductible expenses.[20] There was no evidence to suggest that he was seeking to embark on a different career path or a different role.[21]
[19] Finn at 64 per Dixon CJ
[20] Finn, 70.
[21] cf. Re Ting, [35].
Accordingly, Mr Masters is entitled to deductions for the course fees incurred in the relevant year for the degree of Juris Doctor ($17,290.84) and the costs of the textbooks he purchased ($945.92), less the reduction of $250 as per s 82A(1) of the ITAA 1936. As noted at [11] above, Mr Masters claimed he was entitled, in the alternative, to claim his Maserati vehicle expenses as “work-related self-education expenses”. While I accept Mr Masters likely travelled from work to UTS in his Maserati, his evidence was lacking as to any detail about the number of days he attended UTS throughout the relevant year. He provided only very rough estimates of his attendances at UTS in his oral evidence based on typical UTS term dates without relevant supporting documents, except for his bank statements showing two payments for “Wilson parking” at Haymarket.[22] I was also not persuaded that his logbook entries for “university after work” were accurate as to his attendances at UTS as this information was not supported by any independent evidence. Accordingly, Mr Masters did not satisfy me of the expenses he claimed for travelling to UTS and, therefore, I am not prepared to allow any such expenses in the relevant year. Similarly, Mr Masters did not persuade me that he incurred parking in the amount of $3,200 and tolls in the amount of $1,378 in the relevant year, because his evidence was deficient.
[22] Exhibit A5.
IS MR MASTERS ENTITLED TO CLAIM DEDUCTIONS FOR OTHER WORK-RELATED EXPENSES?
The Commissioner submitted that Mr Masters has not shown that he is entitled to a deduction for other work-related expenses in the amount of $8,371. In particular, the Commissioner argued that Mr Masters had claimed for items which were not used for income earning activities in the relevant year. Additionally, the Commissioner stated that Mr Masters has not substantiated the expenses, as required in Division 900 of the ITAA 1997, that is, he did not produce all the relevant receipts.
I generally agree with the Commissioner, except that I am prepared to allow Mr Masters a deduction for depreciation for the MacBook Air purchased in or about July 2011.[23] I was satisfied on the basis of Mr Masters’ oral evidence that this computer was used by him for work purposes and for studying. He said, and I accept, that he prefers to use a desktop at home with a larger screen for non-work-related purposes. As to the balance of the expenses claimed by Mr Masters, I was not satisfied they were expenses incurred in gaining or producing his assessable income and, in addition, there was insufficient evidence to substantiate some of the expenses.
[23] T9-182.
IS MR MASTERS LIABLE TO ADMINISTRATIVE PENALTY? IF SO, SHOULD IT BE REMITTED?
Mr Masters was assessed for an administrative penalty at the rate of 25% of the shortfall amount as he made a false or misleading statement with regard to his 2012 income tax return and for failure to take reasonable care in relation to compliance with taxation laws.[24] Mr Masters objected to the penalty on the basis that he had not failed to take reasonable care. He also argued that he was entitled to the safe harbour exemption in s 284-75(6) and so should be treated as having exercised reasonable care. This was on the basis that he claimed to have given all relevant taxation information to his tax agent and the tax agent’s statements in his tax return did not result from intentional disregard or recklessness as to the operation of the tax laws.
[24] s 284-75(1) and table item 3 in s 284-90(1) in Schedule 1 to the TAA.
Mr Masters said at the hearing that he did not have all the records for the relevant year as he had provided these to Mr Zerafa for the purpose of finalising his tax return. However, Mr Masters could not produce any independent evidence as to whether he had given the information to Mr Zerafa in the first place. In this regard, Mr Masters failed to satisfy s 284-75(7) which states that if a taxpayer wishes to rely on s 284-75(6), the taxpayer bears an evidential burden in relation to proving the taxpayer gave the registered tax agent all relevant taxation information. Mr Masters also explained that he was unable to ask Mr Zerafa to assist him as he was no longer working at Owen T Daniel & Co when his income tax audit commenced in mid-June 2014 (approximately 18 months after he lodged his tax return for the 2012 income year), and he had some difficulties locating him afterwards.
I was not satisfied that the Commissioner’s decision with respect to the imposition of penalty was incorrect and should have been made differently as Mr Masters did not discharge his burden of proving this.[25] My conclusion is based on the fact that Mr Masters is a very knowledgeable professional who claimed very significant deductions and who should have been more careful. I accept that Mr Masters sought the advice of his accountant prior to incurring expenses for self-education. However, as to the balance of the expenses for which he claimed deductions, it was not clear whether Mr Masters had sought advice and or provided his former accountant with all relevant information to enable him to correctly lodge his return. The fact that Mr Masters was subsequently unable to get the assistance of his former accountant for the income tax audit does not excuse him, nor is it relevant in terms of evaluating the statements Mr Masters made in his return, especially in circumstances where he could not prove that he had provided all relevant taxation information to his accountant. Additionally, Mr Masters left me with the impression that he was prepared to stretch the truth when it came to claiming deductions in order to reduce his taxable income, just as he had probably given false information to his insurer so as to save on the insurance premium payable for the Maserati. So much was also clear from the fact that some deductions were without any foundation, including deductions for a Pinarello bicycle and helmet. There was no evidence that Mr Masters rode his bicycle between workplaces.
[25] s 14ZZK(b)(ii) of the TAA.
In the circumstances, there is also no basis for the Tribunal to exercise its discretion pursuant to s 298-20(1) in Schedule 1 to the TAA to remit any part of the penalty that is properly payable.
CONCLUSION
For the reasons set out above, I have decided that the Commissioner’s objection decision in relation to the amended assessment for the year ended 30 June 2012 is set aside and the matter is remitted to the Commissioner to issue an assessment in accordance with the Tribunal’s reasons. I affirm the objection decision relating to the assessment of administrative penalty, to be recalculated in respect of the revised tax shortfall.
I certify that the preceding 73 (seventy- three) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member
..................................[sgd]......................................
Associate
Dated: 30 June 2017
Date of hearing: 13 October 2016 Applicant: Self-represented Counsel for the Respondent: Mr Q Rares Solicitor for the Respondent: Ms K Wong, Commissioner of Taxation
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