Mathews and Commissioner of Taxation (Taxation)
[2023] AATA 1329
•24 May 2023
Mathews and Commissioner of Taxation (Taxation) [2023] AATA 1329 (24 May 2023)
Division:SMALL BUSINESS TAXATION DIVISION
File Number: 2021/9955
Re:Douglas Mathews
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Dr M Evans-Bonner
Date:24 May 2023
Place:Perth
The Reviewable Decision is affirmed.
..............[Sgd]..........................................................
Senior Member Dr M Evans-Bonner
CATCHWORDS
TAXATION – income taxation – Applicant claimed deductions of $70,626 in car repairs and car expenses and $78,884 in other deductions including for mineral exploration drilling equipment – financial year ending 30 June 2020 – whether deductions allowable under s 8-1, 8-5 or s 40-730 of the ITAA 1997 – characterisation of income – whether carrying on a business – personal services income – employee or independent contractor – whether expenditure incurred in gaining income – apportionment – substantiation – whether Applicant carried on a business of exploration or prospecting for minerals or quarry materials – income earnt from employment and personal services income – Applicant found not to be carrying on a business – Reviewable Decision affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth), ss s 8-1, 8-1(1), 8-1(1)(b), 8-1(2), 8-5, 28-110, 28-125, 40-730, 40-730(1), 40-730(4), 40-730(7), 84-5, 995-1
Taxation Administration Act 1953 (Cth), s 14ZZK
CASES
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1
SECONDARY MATERIALS
Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production?
REASONS FOR DECISION
Senior Member Dr M Evans-Bonner
24 May 2023
Mr Mathews claimed substantial tax deductions for the income year ended 30 June 2020 in his income tax return which he submitted to the Australian Tax Office (ATO) on 23 July 2020 (T144).
In his income tax return Mr Mathews listed his occupation as a driller. He did not declare any business income but declared income from salary and wages including income from Hays Specialist Recruitment (Australia) Pty Ltd (Hays) of $91,075 and from Pilbara Drilling Pty Ltd (Pilbara Drilling) of $2,200.
In proportion to this income, Mr Mathews claimed a substantial amount of tax deductions in his income tax return. His deductions were:
Label item for 2020 Income tax return
Amount claimed by Mr Mathews
D1 – work related car expenses
$70,626
D2 – work related travel expenses
$1,967
D5 – other work related expenses
$600
D9 – donations or gifts
$230
D15 – other deductions
$78,884
Total deductions claimed
$152,307
Part of the D1 – work related car expenses of $70,626 included the cost of parts required to repair Mr Mathews’ car after an accident which totalled $66,600. The D15 – other deductions of $78,884 included $73,442 for drilling equipment and Landcruiser parts associated with drilling (T144/322-323).
Given the amounts claimed, it is unsurprising that on 4 August 2020, the Commissioner sent Mr Mathews a letter advising him that the Commissioner was going to audit the D1 and D15 expenses and requested further information from Mr Mathews (T4).
On 17 September 2020, the Commissioner wrote to Mr Mathews to say that the audit had been finalised and that the deductions he had claimed at D1 and D15 had been disallowed and reduced from $149,510 to zero (T92).
The Commissioner issued a notice of assessment for the year ended 30 June 2020 showing a debit owing to the Commissioner of $5,416.85 (T147) (Notice of Assessment).
Mr Mathews objected to the Notice of Assessment in a letter dated 18 October 2020 which was received by the Commissioner on 22 October 2020 (T93; T94). He subsequently gave two separate “notice of objection against assessment” objections to the Commissioner, both dated 26 January 2021, for the D1 and D15 deductions (T95 and T96).
After further information was provided by Mr Mathews, the Commissioner allowed the Applicant’s objection in part on 2 August 2021 by allowing deductions of $844 (T141; T2; Respondent’s Statement of Facts, Issues and Contentions (SFIC)/[32]). The Commissioner also determined that an amount of superannuation of $6,555 which Mr Mathews included as assessable income was in fact a tax-free withdrawal and so it was excluded from his assessable income (T2/16).
It is this objection decision dated 2 August 2021 that is the Reviewable Decision before the Tribunal (T141; T1).
Consequently, on 7 February 2022 the Commissioner issued an amended notice of assessment (Amended Notice of Assessment) for the year ended 30 June 2020 showing a refund of $6,074.62 was due to Mr Mathews (ST1).
The effect was that there is an amount of tax in dispute of $32,541.80 (Respondent’s SFIC/[35]), which Mr Mathews would have received by way of a refund if his objection had been allowed.
On 18 December 2021, Mr Mathews sought review of the Reviewable Decision in this Tribunal.
ISSUE
The issue I must determine is whether the expenses in D1 and D15 claimed by Mr Mathews are deductible under s 8-1, 8-5 or 40-730(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
This involves a consideration of whether:
(a)the expenses claimed were incurred in gaining or producing Mr Mathew’s assessable income or whether they were necessarily incurred in his carrying on a business for the purpose of gaining or producing assessable income (as required by s 8-1(1) of the ITAA 1997);
(b)whether the expenses claimed were of a capital, private or domestic nature (if so, no deduction is allowable pursuant to s 8-1(2) of the ITAA 1997); and
(c)whether Mr Mathews can substantiate the expenses pursuant to the record keeping requirements in Division 28 and Division 900 of the ITAA 1997.
After he commenced these Tribunal proceedings, Mr Matthews sought to raise a new ground of objection that he was entitled to the deductions pursuant to s 40-730 of the ITAA 1997 because he was carrying on the business of exploration or prospecting for minerals, or quarry materials, obtainable by such operations and that the expenditure was necessarily incurred in carrying on that business. On 19 August 2022, I gave leave to Mr Mathews to rely on that new ground.
Therefore, my consideration will also include whether Mr Mathews would be entitled to the deductions pursuant to s 40-730 of the ITAA 1997.
Pursuant to s 14ZZK of the Taxation Administration Act 1953 (Cth) (TAA), Mr Mathews has the burden of proving that the Amended Notice of Assessment is excessive or otherwise incorrect and what the assessment should have been.
STATUTORY FRAMEWORK
Section 8-1 of the ITAA 1997 concerns general deductions. The relevant subsections are s 8-1(1) and (2) which set out when deductions can and cannot be made:
(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:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
(Notes and asterisks omitted throughout decision.)
Section 8-5 provides for specific deductions to be made if they are provided for elsewhere in the ITAA 1997:
(1) You can also deduct from your assessable income an amount that a provision of this Act (outside this Division) allows you to deduct.
(2) Some provisions of this Act prevent you from deducting an amount that you could otherwise deduct, or limit the amount you can deduct.
(3) An amount that you can deduct under a provision of this Act (outside this Division) is called a specific deduction.
Section 40-730 of the ITAA 1997 provides for a deduction on expenditure on exploration or prospecting. Subsection 40-730(1) provides:
(1) You can deduct expenditure you incur in an income year on exploration or prospecting for minerals, or quarry materials, obtainable by mining and quarrying operations if, for that expenditure, you satisfy one or more of these paragraphs:
(a) you carried on mining and quarrying operations;
(b) it would be reasonable to conclude you proposed to carry on such operations;
(c) you carried on a business of, or a business that included, exploration or prospecting for minerals or quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.
…
Subsection 40-730(4) of the ITAA 1997 defines “exploration or prospecting” as follows:
(4)Exploration or prospecting includes:
(a) for mining in general, and quarrying:
(i) geological mapping, geophysical surveys, systematic search for areas containing minerals (except petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas; and
(ii) search for ore within, or near, an ore-body or search for quarry materials by drives, shafts, cross-cuts, winzes, rises and drilling; and
(b) for petroleum mining:
(i) geological, geophysical and geochemical surveys; and
(ii) exploration drilling and appraisal drilling; and
(c) feasibility studies to evaluate the economic feasibility of mining minerals or quarry materials once they have been discovered; and
(d)obtaining mining, quarrying or prospecting information associated with the search for, and evaluation of, areas containing minerals or quarry materials.
Subsection 40-730(7) of the ITAA 1997 defines “mining and quarrying operations” as follows:
(7) Mining and quarrying operations means:
(a) mining operations on a mining property for extracting minerals (except petroleum) from their natural site; or
(b) mining operations for the purpose of obtaining petroleum; or
(c) quarrying operations on a quarrying property for extracting quarry materials from their natural site;
for the purpose of producing assessable income.
CHARACTERISING THE INCOME
As I mentioned above, Mr Mathews’ income for the financial year ending 30 June 2020 was from work he performed under the contract with Hays and for Pilbara Drilling.
The Commissioner submitted that the contract with Hays was an employment contract, and the work undertaken for Pilbara Drilling was the provision of personal services.
Mr Mathews submitted that his engagements with Hays and Pilbara Drilling were as an independent contractor through his “Drilling and Watering Systems” business, and that he was not an employee.
Deductions under ss 8-1(1) and s 8-5 of the ITAA 1997 for expenses incurred in producing assessable income can be claimed by a range of taxpayers including those who are employees, independent contractors or who provide personal services. However, characterising the income is helpful when considering if an expense is capital, private or domestic in nature and in determining whether Mr Mathews was carrying on a business. Accordingly, it will assist to determine whether s 40-730 of the ITAA 1997 applies.
The Hays Contract
Mr Mathews entered into the contract with Hays, named “Terms of Engagement – PAYG – Australia”, on 26 August 2019 in his own name (T128). There is no reference to his business or his ABN in the contract. I will refer to this document as the Hays Contract.
The work Mr Mathews did for Hays was undertaken between 28 October 2019 and 30 June 2020. He was paid $91,075 for this work and Hays withheld $43,774 in PAYG tax (ST4).
The contract refers to an “Assignment Letter” which provides details of the assignment. That letter was contained in an email dated 16 October 2019 (T100 and T102). It stated that Mr Mathews was to be a drilling supervisor for the client, who was the Water Corporation, and that his contract commenced on 18 October 2019.
The assignment letter referred to Mr Mathews’ “Conditions of Employment” as being:
The terms and conditions of your temporary assignment will be as set out in the Water Industry Award 2010 (Absorbed) and in accordance with the Terms of Engagement signed by you. This includes the National Employment Standards as contained in the Fair Work Act 2009 (Cth).
The assignment letter also stated, under the heading “Agreement” (T102):
You are engaged by Hays to perform work on temporary assignments pursuant to the Terms of Engagement signed by you. Please note that failure to adhere to these terms may result in cancellation of the assignment.
The assignment letter also stated that, “Hays are committed to ensuring your health and safety while on assignment” and stated requirements regarding health and safety including that Mr Mathews would complete the Hays online health and safety induction, follow the reasonable instructions of the client, report any concerns about his health and safety at work and keep in touch with the Hays recruitment consultant during the assignment (T102/215).
Under the Hays Contract Mr Mathews was described as a “temporary casual worker” and the terms indicated that PAYG tax would be deducted by Hays (T128). Hays did not guarantee the duration and length of the assignment and had the discretion to terminate the assignment if the client varied the length or ended the assignment (clauses 3.2 and 3.3). The period of the assignment could only be extended with the prior approval of Hays (clause 3.4). It stated that Mr Mathews was paid an hourly rate, which included a casual loading, and he would only be paid if he submitted timesheets for his work. The contract stated that Hays would make superannuation contributions on Mr Mathews’ behalf (clause 4.8).
The contract further stated that Mr Mathews was to comply with the reasonable directions of Hays and the client (clause 5.1). It imposed undertakings on Mr Mathews including that: he would perform his duties with due care and skill (clause 5.2.2); use his best endeavours to promote and protect the interests of Hays and the client (clause 5.2.6); possessed the necessary skills, expertise and qualifications (clause 5.2.4); would complete safety inductions and safety training (clause 5.2.10 and 5.2.12); would observe any policies, procedures, rules and regulations of the client’s organisation (clause 5.2.8); and would not offer his services to the client without giving Hays the opportunity to represent him (clause 5.2.16).
At the hearing Mr Mathews explained that the Water Corporation needed someone to do the work urgently and so he signed the contract with Hays in his personal name even though he had discussed with them that he wanted to be an independent contractor and wanted to enter into the contract using his business ABN. According to Mr Mathews, at that time Hays would not contract with sole traders and would only accept a “Pty” company. Given the urgency, Mr Mathews agreed to take the job if the money was paid into his ABN bank account. That was why he signed the Hays Contract in his own name, even though it was his intention to be an independent contractor (transcript/37).
In summary, although he contracted with Hays personally and not through his Drilling and Watering Systems business, Mr Mathews submitted that he was contracting through that business, because it was his intention to do so, because he had an ABN for the business and because his pay under the contract was deposited into his business bank account.
Mr Mathews stated that the issue with the contract having to be in his name was subsequently resolved. I note that he registered the company Drilling and Watering Systems Pty Ltd on 4 September 2020 (T154/439). He entered into a second terms of engagement contract with Hays for another project in a subsequent income tax year in that company name. He said that the terms of this second contract were identical to the first one, which I note was confirmed in email correspondence between Mr Mathews and Hays (A2). Mr Mathews stated, however, that under the subsequent contract Hays did not withhold PAYG tax and superannuation. He said that was what the first contract should have done but did not due to the timing issues which resulted in his entering into the first contract under his own name.
The tests for whether a person is an employee, or an independent contractor were recently considered by the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting). Similarly, to Mr Mathews’ situation, Personnel Contracting involved a labour-hire situation whereby the worker contracted with the labour-hire company to undertake work for a third-party client.
In Personnel Contracting Kiefel CJ, Keane and Edelman JJ (at [39]) confirmed that the question is whether the person is working in their own business, or the business of another entity. Specifically, “whether the putative employee’s work was so subordinate to the employer’s business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise”.
The right of the putative employer to exercise control over the work that the employee is to do and control over how the work is to be carried out is also relevant (at [77]). Their Honours explained (at [73]):
Like the “own business/employer's business” dichotomy, the existence of a right of control by a putative employer over the activities of the putative employee serves to sensitise one to the subservient and dependent nature of the work of the employee, so as to assist in an assessment of whether a relationship is properly to be regarded as a contract of service rather than a contract for services.
… But this Court in Stevens [v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 at 24, 36], and indeed in Zuijs [v Wirth Brothers Pty Ltd (1955) 93 CLR 561 at 571] itself, emphasised that it is the right of a person to control the work of the other, rather than the detail of the actual exercise of control, which serves to indicate that a relationship is one of employer and employee.
With respect to control their Honours observed that, “the gravamen of the concept of control lies in the authority to exercise control and not its practical exercise” (at [88]).
Similarly, Gageler and Gleeson JJ, at [113], explained:
Where a continual relationship under which work is done by an individual in exchange for remuneration in fact exists, the characterisation of that relationship as one of employment or service, on the one hand, or as one of hirer and independent contractor, on the other hand, has long been understood to turn on one or other or both of two main overlapping considerations. The first is the extent of the control that the putative employer can be seen to have over how, where and when the putative employee does the work. The second is the extent to which the putative employee can be seen to work in his or her own business as distinct from the business of the putative employer. Factors relevant to that second consideration have been said to include, but not to be limited to, “the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegation of work by the putative employee”. A third consideration sometimes identified is perhaps little more than a variation of the second consideration: it is the extent to which the work done by the putative employee can be seen to be integrated into the business of the putative employer.
(Footnotes omitted.)
In a separate judgment, Gordon J at [174], with whom Steward J agreed (at [203]), had a slightly broader approach, although the passage I have highlighted in bold included the factor of control:
The task is to construe and characterise the contract made between the parties at the time it was entered into. The nature of the contracting parties, such as where a contracting party is a separate entity or a partnership, rather than an individual, may suggest that the relationship between the parties is not that of employer and employee. The way that the contractual terms address the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, the provision for holidays, the delegation of work, and where the right to exercise direction and control resides may together show that the relationship is not one of employer and employee.
(Footnotes omitted.)
Before applying Personnel Contracting, I note that Mr Mathews initially submitted that the Hays Contract was a “sham” because it represented that he was an employee when he says he was an independent contractor (transcript/42), although he later conceded the description of a “sham” was “a bit harsh” (transcript/45). I understood the totality of Mr Mathews’ submission to be that it was a “sham contract” because he had discussed with Hays that he intended to be an independent contractor, and because his conduct indicated an independent contractor relationship. That conduct was Mr Mathews’ use of three of his own vehicles, being a six-wheel drive, a four-wheel drive and a Toyota Camry sedan. However, Mr Mathews confirmed that he had offered to use his own vehicles at no cost to the Water Corporation (T98/208). He was provided with a car which he used for driving to the town site but had offered to use his own four and six-wheel drive vehicles because he did not think the car provided adequately met onsite safety requirements. He also ended up bringing a third vehicle, the Toyota Camry sedan, because he said there was no point in the Water Corporation hiring a vehicle that was not used (transcript/38-39).
In Personnel Contracting, Kiefel CJ, Keane and Edelman JJ, at [43], observed:
While there may be cases where the rights and duties of the parties are not found exclusively within a written contract, this was not such a case. In cases such as the present, where the terms of the parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject of an estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship.
Most often claims that a contract is a sham are made by an employee who has not been paid entitlements such as superannuation because the contract purports to be a contract for services when in reality it is an employment contract. Here, Mr Mathews is arguing the reverse, that is, that the Hays Contract was a sham because he was an independent contractor due to his own intention and conduct.
I do not think that the contract was a sham. I accept that Mr Mathews wanted to contract as an independent contractor, but he could not do so because Hays would not contract with a sole trader and instead required a Pty Ltd company. Mr Mathews therefore made the decision to proceed with the contract in his personal capacity. The terms of his relationship with Hays were comprehensively set out in that written contract. I do not think Mr Mathews’ subsequent offer and conduct in using his own vehicles altered the express terms of the contract or made the contract a sham. The contract did not require him to provide his own vehicle but contemplated that if he did use a “personal car” he would be responsible for his own insurance (clause 5.4).
Applying Personnel Contracting, the terms of the Hays Contract that I outlined at paragraphs [34]-[35] above, including Mr Mathews’ lack of control over the length and duration of his work, the requirement to comply with reasonable directions and the contractual undertakings imposed on Mr Mathews, are indicative that Hays exercised control over Mr Mathews in a manner that suggests he was working for them as an employee, rather than in his own business. The mode of remuneration with Hays deducting PAYG tax and paying superannuation are also suggestive of an employment relationship (Gordon and Steward JJ).
I therefore find that Mr Mathews was an employee of Hays under the Hays Contract.
Pilbara Drilling
Mr Mathews also did some work for Pilbara Drilling in April and May of 2020 (T93/195).
The Commissioner submitted that the Pilbara work was personal services income.
Mr Mathews submitted that he did this work through his Drilling and Watering Systems business and that it was consequently income produced in carrying on a business of exploration or prospecting for minerals or quarry materials. I deal with the question of whether Mr Mathews was carrying on a business in the next section of these reasons. Here, I will deal with whether this income could be characterised as personal services income under s 84-5 of the ITAA 1997.
Section 84-5 of the ITAA 1997 is titled “Meaning of personal services income” and provides:
(1) Your ordinary income or statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).
…
(2) Only individuals can have personal services income.
(3) This section applies whether the income is for doing work or is for producing a result.
(4) The fact that the income is payable under a contract does not stop the income being mainly a reward for your personal efforts or skills.
(Notes omitted.)
There is no contract for this work. The evidence of this work is an invoice dated 16 May 2020 for $2,200 (including $200 GST) from Drilling and Watering Systems (with an ABN stated) to Pilbara Drilling (T117/232). The work undertaken is described briefly at the top of the invoice as:
Redmond Pty LTD – Supply licensed driller/ supervisor
Drilling of 1 pilot hole and 2 production bores
The business bank account for Drilling and Watering Systems was listed at the bottom of the invoice as being the account where payment was to be made to.
It is unclear why Mr Mathews charged for GST in this invoice because his ABN details as at 25 January 2022 show that he had not been registered for GST since 21 July 2000 (T151/436).
Following a request from the Commissioner, Mr Mathews provided further details to the Commissioner about the nature of the work he did for Pilbara Drilling. In an email to the ATO dated 23 April 2021 (T116/231), Mr Mathews described the type of work as follows:
My work for Pilbara Drilling Pty Ltd is to mentor, teach drilling skills, rig safety, aquifer identification, drilling fluid usage and avoid aquifer damage.
I work 10hr/day and charge a minimum of $25/hour due to his circumstance.
I worked from 23.04.2020, 24,25(no charge), 27,28,29,30,
01.05.2020,02 and 03.05.2020. all 10 hour days.
Based on Mr Mathews’ evidence, the work he undertook consisted of mentoring and teaching. The income of $2,200 was therefore a reward for his personal efforts or skills as contemplated by s 84-5 of the ITAA 1997. I therefore agree with the Commissioner’s submission that the income from Mr Mathews’ work with Pilbara Drilling was personal services income. As I will explain below in the next section of these reasons, I do not think that Mr Mathews was carrying on a business.
WAS MR MATHEWS CARRYING ON A BUSINESS?
I now turn to whether Mr Mathews was carrying on a business in the financial year ending 30 June 2020 in a general sense, and more specifically whether he was carrying on a business of exploration or prospecting for minerals or quarry materials.
Subsection s 8-1(1)(b) and s 40-730(1) of the ITAA 1997 refer to the taxpayer being able to make deductions associated with carrying on a business.
“Business” is defined in s 995-1 of the ITAA 1997 as follows:
“business” includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
Although it concerns primary production (which is not relevant to this application) Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides some guidance as to when a person will be carrying on a business (see paras [13]-[18], including the table of main indicators). TR 97/11 lists the following indicators as being relevant (para [13]):
· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;
· whether the taxpayer has more than just an intention to engage in business;
· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
· whether there is repetition and regularity of the activity;
· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
· the size, scale and permanency of the activity; and
· whether the activity is better described as a hobby, a form of recreation or a sporting activity.
(Paragraph references omitted.)
In his objection letter dated 18 October 2020, Mr Mathews stated that he was a licensed driller and prospector and that he was operating his “Drilling and Watering Systems” business which involved him seeking “contracts for drilling, consulting, prospecting, drill rig design and construction of drilling equipment”. He further stated that: “The aim of the business is to make a profit by providing contract drilling for minerals, water, environmental, geotechnical, mineral exploration, prospecting, consulting, and building of drilling rigs” (T93/194).
In his SFIC Mr Mathews described his business as a “multi-faceted drilling and prospecting business” (para [22]). He further described himself as “carrying on a business of exploration drilling, prospecting, consulting and supervision”, which he regarded as falling within the scope of s 40-730 of the ITAA 1997 (para [9]-[10]).
The information Mr Mathews submitted in support of his submission that he was carrying on a business included:
·His curriculum vitae which details his employment history (A3).
·His water wells drillers licence, heavy vehicle licence, and other training that he has completed (T95/199-200; T96/203).
·His prior business history including:
oFrom 9 November 2018 to 29 November 2018 where he provided a drilling and consultation service to Gulkula Mining for which he had invoiced $3,200 which was declared in his 2019/2020 income tax return (T95/200; T96/203). This led to the formation of Drilling and Watering Systems (T93/194).
oHis previously being the original shareholder and a director of a company called Matfem Exploration Pty Ltd (Matfem) which was deregistered on 15 June 2016 (T157/444).
·A single page agreement dated 1 July 2019 between Drilling and Watering Systems and Matfem (and or Riccardo Ortega who was the director of Matfem before it was deregistered) whereby “the parties … agree to sell the entire stock of new drilling assets, equipment and consumables to Drilling and Watering Systems during the financial years 01/07/2019 to 30/06/2021 at market rates” (T132/262). That is, Matfem or Mr Ortega was agreeing to sell stock to Drilling and Watering Systems. The agreement provided monthly payments would be made by Drilling and Watering Systems to Mr Ortega or Matfem. There is no inventory of the goods being purchased, nor any purchase prices, nor are amounts of the monthly repayments stated. There are 10 invoices between 31 July 2019 and 30 June 2020 which show stock purchases of various amounts under this agreement (T37-T46).
·An ABN as an “individual/sole trader” which was active from 5 November 2018 and that he registered the business name, “Drilling and Watering Systems” from 6 November 2018 (T150/435).
·That he had opened a business bank account for Drilling and Watering systems on 31 January 2019 (T95/200; T96/203; T65/102-166).
·The drilling supervision work he completed under the Hays Contract and for Pilbara Drilling and that payments for the work were made into his business bank account (T95/200-201; T96/203).
·An excel spreadsheet listing the income and expenses claimed in Mr Mathews’ income tax return (T35).
I am not persuaded, having regard to the factors in TR 97/11, that there is sufficient evidence that Mr Mathews was carrying on a business in the taxation year ending 30 June 2020. There is no business plan or projections, no business financial records other than a bank account in the name of Drilling and Watering Systems and an ABN, and no specific details of any exploration or prospecting activities or mining or quarrying operations being undertaken in the taxation year ending 2020.
With respect to any prospecting or exploration activities, or indeed mining and quarrying operations, the evidence suggests that Mr Mathews was not carrying on those activities, but that he had an intention to engage in prospecting or exploration activities in the future.
Specifically, Mr Mathews’ evidence was that after a break he “decided to go back into the drilling and exploration area” and to “start building my drilling business again” which is why he decided to purchase the equipment from Matfem/ Mr Ortega. However, upon the commencement of the COVID-19 pandemic he was not able to travel to remote areas. He admitted that “I had no choice, I couldn’t go anywhere, so I prepared my drilling equipment to be ready to go out there” and that “the industry was shut down, by the mine site people flying in and out, the exploration had just dried up” (transcript/48-50).
There is insufficient evidence to support a finding that Mr Mathews undertook any geological mapping, surveying, searching, feasibility studies or obtaining information associated with the search for and evaluation of areas containing minerals or quarry materials, as contemplated by s 40-730(4) of the ITAA 1997. Similarly, there is insufficient evidence to support a finding that Mr Mathews was undertaking mining operations for extracting minerals or petroleum or quarrying minerals from their natural site within the meaning of s 40-730(7) of the ITAA 1997. Instead, the available evidence supports a finding that Mr Mathews was preparing for his exploration business by acquiring equipment but that there was no exploration being carried on during the relevant tax year and that Mr Mathews simply intended to do so in the future.
For completeness, the nature of his roles with Hays and Pilbara Drilling involved supervising, mentoring, and teaching, and did not involve Mr Mathews undertaking his own exploration or prospecting business.
I find that Mr Mathews was not carrying on a business, including any business of exploration or prospecting or mining and quarrying. This means that the deductions cannot be claimed under s 40-730 of the ITAA 1997. Consequently, the question is whether Mr Mathews can claim the deductions under s 8-1 of the ITAA 1997.
ASSESSING THE DEDUCTIONS
The Commissioner submitted I should find the expenses claimed by Mr Mathews in D1 and D15 that were not allowed by the Commissioner were not for the purpose of producing income, and that some of them were capital in nature and therefore not deductible under s 8-1 or 8-5. I agree with this submission for reasons I will now explain.
D1 – Work-related car expenses
In his income tax return, Mr Mathews claimed work related car expenses of $70,636.45. These comprised $68,566.25 in car expenses and $2,070.20 in fuel expenses.
At the outset, it is relevant to observe that the Hays Contract did not require Mr Mathews to use his own car, nor was he provided with a vehicle allowance (which would support a finding that he was required to use his own car). I am not persuaded that Mr Mathews was required to use one or more of his own vehicles to produce his assessable income. As I outlined above, Mr Mathews offered to use one of his vehicles because he thought the car provided was unsuitable, but he also used two of his other cars.
The $68,566.25 in car expenses comprised $66,600 in repairs to Mr Mathews’ six-wheel drive vehicle which was damaged after a minor accident that occurred when he was undertaking work under the Hays Contract. The figure of $66,600 is stated in an undated invoice which appears to have been written by Mr Mathews but has “Matfem Exploration Pty Ltd and Richard Ortega” in the heading. There is a list of dates and amounts paid that span the whole page of the invoice (T8/38). There do not appear to be any corresponding original receipts. I therefore find this invoice to be an unsatisfactory substantiation that the expenses were incurred.
However, even if I accept this invoice on its face, the description in the invoice as to what was supplied suggests that these expenses were replacement parts and were therefore of a capital nature and not deductible under s 8-1 or 8-5 of the ITAA 1997 (T8/38):
Replacement, 3x Landcruiser differentials, power divider, gearbox, braking system, springs, HJ61 Turbo diesel motor, new aluminium tray
Damaged at Allanooka drill site whilst travelling on rough unsealed corrugated road – Piggery Lane and Mt Horner Road West and Dongara WA
The other $1,956.25 in car expenses consist of vehicle registrations for Mr Mathews’ three vehicles (T9-T13; T106), and purchases of engine oil, degreaser, and a socket set. It is unclear how these expenses were incurred in Mr Mathews’ income earning activity, nor is there any apportionment between private and business use. Mr Mathews also claimed the expenses of a tray, spare wheel plate and bracket, which appear to be capital in nature and therefore not deductible (T27-T32).
I note that following the audit the Commissioner did allow some fuel costs under D2 – work related travel expenses of $1,967. However, I do not think that the $2,070.20 in fuel expenses claimed by Mr Mathews under D1 are deductible because he has failed to properly substantiate those expenses using the logbook method. He did not keep the logbook over the required period of at least 12 weeks (s 28-110 of the ITAA 1997) and he did not consistently record the day the journey began and ended and the car’s odometer readings at the start and end of the journey (s 28-125). Some of the logbooks have date ranges rather than every trip being logged (T108-T113). One of the records states some numbers of kilometres for private use (T111), but overall, the logbook records lack sufficient detail.
I therefore find that none of the car expenses claimed by Mr Mathews under D1 are deductible.
D15 – other deductions
In this category Mr Mathew’s claimed bank fees for his business bank account, stationery, camping provisions, hardware, health and safety, communications and IT, mineral exploration and drilling consumables, insurance and PPE (personal protective equipment). The expenses claimed under this category of deductions totalled $78,884.
The most significant expense in this category was for $73,200 for mineral exploration drilling equipment, which Mr Mathews referred to as “consumables” purchased from Matfem or Mr Ortega under the 1 July 2019 agreement. However, Mr Mathews confirmed that he was not specifically requested to provide any tools or equipment for his work at Hays and did so to minimise potential breakdown time (T98/208). He also stated that he “provided TDS, Ph and density meters, various hand tools in my work with Pilbara Drilling, these drilling consumables would have been available if needed” (T121/238). In other correspondence he referred to purchasing items to avoid downtimes or breakdowns because he would receive no income if that occurred (T85/176). These consumables did not seem to be required to produce his assessable income, but Mr Mathews made the decision to acquire them just in case something went wrong. I therefore do not think that there is a sufficient nexus between these expenses and the gaining and producing of Mr Mathews’ assessable income. Also, although Mr Mathews categorised these expenses as “consumables”, I am not satisfied that some of them were not of a capital nature, for example drill and hammer bits and a system to power a drill rig on one of Mr Mathews’ Landcruiser vehicles. I am therefore not satisfied that these expenses are tax deductible.
I am also not satisfied that some of the other expenses claimed under item D15 were incurred in the gaining or producing of Mr Mathews’ assessable income. I make the following observations:
·The bank fees of $103 claimed are monthly fees on Mr Mathews’ business bank account. As he was not carrying on a business, there is no nexus to the gaining and producing of his assessable income.
·Similarly, stationery expenses of $299 were claimed, but there are no receipts to substantiate this claim and the nexus is also unclear.
·Further, an amount of $555 for “health and safety” was claimed, but there are no receipts to substantiate the expense.
·Camping provisions (which were predominantly food bills) of $2,245 were claimed for the period when Mr Mathews was working for Hays, however food is a private expense and there is an insufficient nexus between those expenses and the gaining or producing of Mr Mathews’ assessable income.
·Mr Mathews also claimed $680 for hardware. The Commissioner allowed $160.97 of these expenses (for safety glasses, hardware for a communication connection and a calculator) under D5 – other work-related expenses. Mr Mathews made a claim for an esky, ice and water under this category, which he said he brought to provide cold drinks for the drillers he was supervising because the ice machine had broken down and it was over forty degrees at the work site (transcript/43). I agree that this expense is best categorised as private because whilst being considerate of his staff, the purchase was not required for Mr Mathews to produce his assessable income. The other expenses were incurred outside of the time of his employment and consequently lack the sufficient nexus.
·A claim for insurance of $1,000.93 being the annual insurance for Mr Mathews’ Toyota Camry sedan and his RAC membership was also made but as I have already stated, the logbook was not sufficiently completed to apportion the amount of business and personal use.
·A further amount of $87.45 was claimed for “PPE”, with $12.15 of this amount being incurred outside of the employment period and $75.30 being basic clothing items from K-mart. I am therefore uncertain as to whether the items could be classified as PPE.
·Mr Mathews also claimed an amount for communications and IT of $1,802 (for which receipts of $1,629.39 were provided to the Commissioner). The expenses claimed in this category included 100% of Telstra bills of $420.89. No receipts were provided for the Telstra bills. The Commissioner accepted that Mr Mathews would have needed a telephone with him when gaining his assessable income but did not accept that 100% of the use was for business purposes. Therefore, the Commissioner allowed 50% of the Telstra bills to be claimed (T2/22). This is a more generous conclusion than I could have arrived at given the absence of any Telstra receipts, but one that, out of fairness to Mr Mathews, I do not propose to disturb. I am unclear as to the nexus between expenses for Adobe, Driver support, JB Hi Fi, WinZip and McAfee, and the gaining or producing of Mr Mathews’ assessable income. Additionally, $947.75 of the expenses were incurred outside of the employment period.
CONCLUSION
For the reasons outlined above, I have found that, except to the extent that they were allowed by the Commissioner, the expenses in D1 and D15 claimed by Mr Mathews are not deductible under s 8-1, 8-5 or 40-730(1) of the ITAA 1997.
In other words, Mr Mathews has not met the burden under s 14ZZK of the TAA of proving that the Amended Notice of Assessment is excessive or otherwise incorrect and what the assessment should have been.
DECISION
The Reviewable Decision is affirmed.
I certify that the preceding 86 (eighty-six) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr M Evans-Bonner
.............[Sgd]........................................................
Associate
Dated: 24 May 2023
Date of hearing: 29 November 2022 Representative for the Applicant: Self-represented Representative for the Respondent:
Ms K McClurkin, Australian Taxation Office
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