Payne, Andrew v Commissioner of Taxation of the Commonwealth of Australia
[1998] FCA 758
•2 JULY 1998
FEDERAL COURT OF AUSTRALIA
INCOME TAX – Allowable deductions within the meaning of s 51(1) of the Income Tax Assessment Act 1936 (Cth) – whether expenses for travel between two places of income production were incurred in gaining or producing the assessable income – Appeal from Administrative Appeals Tribunal – error of law – relevant legal principle to be applied in considering allowable deductions – “essential character of the expenditure” – necessity to consider whole of factual matrix in which expenditure occurred when characterising outgoing – whether there is a distinction between “related” and “unrelated” sources of income derivation in wording of s 51(1) – whether “prerequisite to earning of assessable income” principle of Lunney & Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478 is conclusive where travel between two independent places of income production – relation of travel expenses to whole of earning of assessable income – Whether to remit to Administrative Appeals Tribunal.
ADMINISTRATIVE LAW – Procedural fairness – Appeal from Administrative Appeals Tribunal – whether tribunal made its decision on basis of matters outside issues agreed to between the parties – whether existence of agreed issue between the parties.
Income Tax Assessment Act 1936 (Cth) - s 51(1)
Administrative Appeals Tribunal Act 1975 (Cth) - s 44
Taxation Ruling IT 2199
Garrett v FCT (1982) 58 FLR 101 – discussed, explained, approved
Lunney and Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478 - discussed and distinguished
Ronpibon Tin NL & Anor v Federal Commissioner of Taxation (1949) 78 CLR 47 - considered
W Neville & Co Ltd v Federal Commissioner of Taxation (1936-37) 56 CLR 290 - referred to
Commissioner of Taxation of the Commonwealth of Australia v Smith (1980-81) 147 CLR 578 - considered
Federal Commissioner of Taxation v Cooper 91 ATC 4396 - considered
Federal Commissioner of Taxation v Green (1950) 81 CLR 313 - considered
Commissioner of Taxation v Genys (1987) 17 FCR 495 - considered
In Re The Income Tax Acts (1903) 29 VLR 299 - discussed and distinguished
Taylor v Provan (Inspector of Taxes) (1975) AC 194 - discussed
Case F 43 74 ATC 245 - discussed
Federal Commissioner of Taxation v Collings 76 ATC 4254 - cited
ANDREW PAYNE v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
NG 475 OF 1997
FOSTER J 2 JULY 1998 SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 475 of 1997
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN:
ANDREW PAYNE
APPLICANTAND:
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
RESPONDENTJUDGE:
FOSTER J
DATE OF ORDER:
2 JULY 1998
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
The appeal be upheld.
The matter be remitted to the Tribunal for reconsideration in accordance with these reasons.
The respondent pay the applicant’s costs of this appeal.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 475 of 1997
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN:
ANDREW PAYNE
APPLICANTAND:
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
RESPONDENT
JUDGE:
FOSTER J
DATE:
2 JULY 1998
PLACE:
SYDNEY
REASONS FOR JUDGMENT
This is an appeal from a determination of the Administrative Appeals Tribunal (“the Tribunal”) constituted by a Senior Member, which was given on 16 May 1997. The determination upheld a decision of the respondent (“the Commissioner”) disallowing objections lodged by the applicant (“Mr Payne”) against amended assessments issued by the Commissioner on 13 December 1995 in respect of the income tax years ending 30 June 1991 to 1994 inclusive. The effect of the amended assessments had been to disallow certain travelling expenses claimed as deductions pursuant to s 51(1) of the Income Tax Assessment Act 1936 (Cth) (“the Act”) in each of the years in question. In those years Mr Payne had two sources of assessable income, one being his salary as a pilot employed by Qantas and the other his earnings from a deer farm business conducted by him on a property at Duri near Tamworth, where he also resided. Mr Payne travelled regularly from the farm property to the airport at Mascot and back in circumstances to which I shall refer in greater detail hereafter. He claimed that he was entitled to deduct the cost of this travel and associated accommodation expenses, as having been incurred in “gaining or producing the assessable income” within the meaning of s 51(1). This claim was rejected by the Commissioner. The appeal to this Court, brought pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) is restricted to questions of law.
The appeal is based on two grounds which are stated in the applicant’s outline of submissions as follows:-
“(a)whether on the facts as found, the Tribunal erred in law in failing to determine that the applicant was entitled to deductions conformably with section 51(1) of the Income Tax Assessment Act 1936 (‘the Act’) for travel expenses between two places of income production;
(b)whether the Tribunal erred in law in failing to consider and uphold the applicant’s objections and set aside the objection decisions upon the basis that the applicant’s claim fell within the terms of Income Tax Ruling IT 2199.”
It is convenient to consider the second ground at the outset of these reasons. It appears in expanded form in the applicant’s notice of appeal as follows:-
“(d)Whether the Tribunal failed to accord to the applicant natural justice and denied him procedural fairness by failing to consider the agreed dispute between the applicant and the respondent, namely, whether the facts as found fell within the terms of Taxation Ruling IT 2199;
(e)Whether, in circumstances where the respondent agreed that the issue for determination before the Tribunal was whether the applicant was entitled to a deduction under Section 51(1) of the Act if the applicant satisfied the requirements of Income Tax Ruling IT 2199, the Tribunal should have determined that agreed issue rather than to determine the applications by having regard to matters which the respondent did not raise as issues for trial.”
The grounds of appeal further claimed that procedural fairness had been denied the applicant as the Tribunal had decided the application “on the basis of matters outside the issues agreed to between the parties” it being asserted that the applicant would otherwise have led further evidence, argued for findings of additional fact and presented alternative arguments to the Tribunal.
It is clear that this complaint has its genesis in a view taken by Mr Payne and his accountant of the effect of Taxation Ruling IT 2199 (“IT 2199”) issued on 27 September 1985. That Ruling was criticised by the learned Senior Member as being ambiguous. Because, in his view, the applicant had been mislead by this ambiguity into claiming the deductions, he set aside penalties which had been imposed by the Commissioner on the basis of carelessness by the applicant in the preparation of the relevant returns. However, it is clear that the Senior Member did not approach his decision on the basis that there was an agreed issue between the parties that, should the case fall within the wording of IT 2199, then the claimed deductions should be allowed. IT 2199 is a fairly lengthy document and I do not propose to set it out in full in these reasons. It is clear that its application to the claimed deductions was the subject of debate in correspondence between Mr Payne and the Commissioner’s representatives. In its preamble reference is made to some inconsistency which appeared to have arisen in the application of s 51(1) to expenses incurred in travelling between “two places of employment, two places of business or a place of employment and a place of business”. It indicated that its purpose was to restate the approach to be adopted in such cases. It referred to the decision in Garrett v FCT (1982) 58 FLR 101, a case to which I shall make reference later, as being “the most recent judicial consideration of this topic”. It then went on to say that the relevant travel “must be for the purposes of engaging in the income producing activities” and that this was of particular importance “where one of the places of employment or business is the home of the taxpayer”.
IT 2199 indicated that, in circumstances where the taxpayer did not live at either of the work places, then expenses incurred in travelling between the two places would be deductible, providing the travel had been undertaken for the purpose of enabling the taxpayer to engage in income producing activities. However, difficulty could arise where the taxpayer lived at one of the places of work and it was not practicable to lay down a Rule capable of application in all cases. Accordingly “some general propositions” were made “as a framework within which individual cases may be determined”. One such general proposition was stated as follows:-
“In many instances it will be readily apparent that the cost of travel between the home based employment or business and an employment or business located elsewhere is part and parcel of the income producing activities and allowable as an income tax deduction. In the Garrett case, for instance, the taxpayer lived at A where he conducted both a medical practice and a farm. He also conducted medical practices in other centres from which he derived significant amounts of income. The Court found that travel between the various centres was part of the operations by which the taxpayer produced his assessable income and its cost was an allowable deduction”
Some instances were then given where the cost of travel would be deductible. IT 2199 then continued:-
“By way of contrast situations may arise where a taxpayer has full-time employment or carries on a business away from home and also conducts a part-time income producing activity from his home which he attends to in the evening or at weekends or, perhaps, at various times during the year.”
It was also indicated that in the reverse situation where the taxpayer carried on a business from his home but engaged part-time in employment or other business activity outside the normal hours of business away from the home that travel costs between the home and the place of the after hours activity would not be deductible.
The applicant held the view, which was later confirmed by findings of the Tribunal, that he conducted a full-time business at his home at Duri as well as being engaged in full-time employment as a pilot operating from Mascot and that, in these circumstances, neither of the activities being part-time, he was, by dint of IT 2199, entitled to a deduction for the travelling expenses. He asserted this claim to the Commissioner.
It is clear from the correspondence between the parties, however, that the Commissioner made no concession in this regard. Although the phrase “for the purposes of engaging in the income producing activities” was ambiguous, it appears to have been the Commissioner’s assertion that it did not alter the position said to have been established by Lunney and Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478, viz that travelling expenses were not deductible if they were incurred merely as a prerequisite to the taxpayer’s engaging in income earning activities at his destination, ie if he was travelling to work rather than on work. Although there is some indication that the Commissioner may not have been prepared to accept that the work at the deer farm was relevantly “full-time”, it seems clear that the additional assertion was made that the travel could not, in any event, be regarded as a working expense. It seems, however, that as a result of conversations between the applicant’s accountant and the representative of the Commissioner dealing with the case, that some misapprehension arose to the effect that, if the applicant could establish that he fell within the terms of IT 2199, he should be entitled to the claimed deductions. The very ambiguity of IT 2199 could, in my opinion, account for this misapprehension, with the phrase referred to above meaning one thing to the Commissioner’s representative and another to the applicant.
It appears from portions of the transcript of the hearing before the Tribunal, to which I was taken by counsel for the applicant, that an issue in these terms was sought to be raised before the Tribunal. It is submitted on behalf of Mr Payne that an agreed issue was in fact presented to the Tribunal for determination, namely that the deduction should be allowed if the circumstances fell within the wording of IT 2199. The Tribunal’s failure to determine this issue, it is now submitted , amounted to a denial of procedural fairness. I have read and considered the passages to which I have been taken. In my view they do not support the applicant’s contention. The matter was raised in what I regard as a tentative way at the beginning and at the end of the proceedings. In my view, it would reasonably have appeared to the Tribunal to be no more than a statement of an expectation on the part of the applicant that the Commissioner would concede that this was an issue for determination. The concession was, quite clearly, not made. In my view, the Tribunal was amply justified in regarding the matter of compliance or non-compliance with IT 2199 as going only to the question of whether penalties should have been imposed. As I have already indicated, the learned Senior Member considered that it was not unreasonable that the applicant should have been misled by the ambiguity of IT 2199 and consequently set aside the penalties. This aspect of the Tribunal’s determination has not been made the subject of a cross-appeal to this Court. I do not consider that any procedural unfairness in the proceedings before the Tribunal has been demonstrated. Accordingly, I reject this ground of appeal.
In considering the first ground set out above it is necessary to have regard to the facts of the matter in more detail. As the Tribunal found, they were not in dispute.
THE TRIBUNAL’S FINDINGS OF FACT
The Tribunal found that the applicant had been employed as a pilot by Qantas and that, by the beginning of the income years in question, he had achieved the rank of captain and had had a number of years of experience in command of international flights. Also, prior to those years, he had developed the grazing property upon which he resided with his family at Duri, from its original use as a cattle grazing property, into an elaborately structured deer farm. He had carried out most of the tasks in establishing the farm, unaided. Those tasks had been very elaborately described in witness statements produced for the hearing. This evidence was accepted by the Senior Member. He summarised it in this form:-
“These tasks included, to name but a few, the erection of fencing, the cultivation of grazing crop, the supplementary feeding of the deer, the removal of antler (called ‘velveting’), herd observation and the recording of information for genealogical purposes, general farm maintenance, and the marketing and sale of both live and culled stock as well as antler. Income is derived from these sales as well as from the rental of stags. Each of these activities, and especially the velveting, are dependent on the Applicant’s experience and acquired expertise.”
The Senior Member went on to say that the evidence made it clear that the farm was “a considerable undertaking, carefully structured, conscientiously managed, deriving substantial gross income and requiring the dedication of much time, skill and experience”. It was noted that there was no dispute that Mr Payne was carrying on the business of deer farming and that the property at Duri was relevantly a place of business.
Considerable information had been supplied by the applicant as to the manner in which he conducted the farming operations at Duri whilst performing full-time duties as an airline pilot with Qantas. It is clear that this required careful organisation by the applicant of his working life, which was largely achievable because of his status as a senior pilot. The Tribunal accepted that the applicant’s employment with the airline was full-time employment. The details of this employment and its interrelationship with the workings of a deer farm provide a basis for the applicant’s submissions of law to this Court. Accordingly, it is appropriate that I set out in full the findings made by the learned Senior Member in this regard. They are as follows:-
“He is able to devote towards his property the considerable time necessary in order to meet the demands of deer farming as well as fulfil the requirements of his airline employment by virtue of a route allocation system utilised by the airline company. The airline company issues in advance routes for a period of 56 days and crew members bid for the available routes. Seniority determines whether a crew member secures a particular choice. In order to meet the requirements for full-time employment each pilot must work about 175 hours in every 56 day period. Night flying is given a weighted credit, whereas the hours not actually at the controls but nonetheless whilst still at work (for example while awaiting the return journey) are credited at a rate of six hours for every 24. Due to his relative seniority and because he bids for routes which are not commonly desirable, the Applicant can regularly secure the routes (usually involving night flying and minimum time away from the controls) which allow him to fill the obligatory quota of flying time but which minimise the actual hours required in order to do so. Thus the Applicant, whose average ‘hours’ are between 175 and 190 in each 56 day period, can often fulfil this quota in a period of 23 to 25 days. This leaves him in excess of 30 days in the 56 day period which he can devote to the deer farm. In weekly terms, he is usually able to organise his flying duties such that he is absent from the farm for about three days in a week, and present at the farm for the remainder of the seven day period. On the occasions where the Applicant is not able to secure his preferred flying duty (he is, in his words, ‘only reasonably senior’), there is nonetheless a significant remainder of the 56 day period which is available to him for concentration on his farming responsibilities at the property.”
The applicant’s statement, which can be regarded as undisputed, also indicated that by selecting the restricted routes that he flew, he was required to forego extra pay that he would have received had he flown other more extensive international routes. He did so, in order to save the time for devotion to his farming activities which required his personal and timely attention. The farm was in an ideal location for the raising of deer, which required that it be at a considerable distance from Sydney. The Tribunal also found that Mr Payne travelled from the property to the airport approximately forty to fifty times each year during the relevant years. When he was on “standby” duty, which, because of his seniority, occurred only fairly rarely, it was necessary for him to travel to, and stay in, the vicinity of the airport during the standby period. On one occasion, when on standby, he had found it necessary to charter an aircraft to take him from the local airport to Mascot in order that he could report for duty on time. The Tribunal also found that the applicant’s routine, so described, was essentially uniform; he performed work at the farm up to the time of departure for the airport and when he returned from the airport to the farm he commenced his farming activities immediately. Mr Payne stated that he would not have lived at the farm had he not been carrying on business there. Also, his earnings as a pilot were necessary for the financing of the farm.
THE TRIBUNAL’S STATEMENT OF ISSUES
The learned Senior Member, having stated that the applicant’s claim was “founded solely on the fact that his travel is between a place of business and a place of employment” summarised the applicant’s argument as focussing upon the overall scope of the income earning activities, which embraced both the derivation of income from the farming activities and also from his employment as a pilot. The assessable income contemplated by s 51(1) comprised earnings from both these sources with the result that travel between the sources, in the circumstances of the case, took place in the course of gaining or producing the assessable income with the result that the cost of the travel was deductible. The fact that the farm was also the applicant’s residence did not affect this result once it was accepted that the farming activity amounted to a full-time business conducted at the premises. He noted the respondent’s argument based on Lunney, to the effect that the travel expenses were neither part of the cost of running the deer farm nor were they incurred in the performance of his work as a pilot. They were merely prerequisite to these separate earning activities. Consequently they were not expenses incurred in gaining or producing the assessable income and were properly to be regarded as being of a private nature. As such they were not deductible under s 51(1) of the Act.
THE TRIBUNAL’S REASONING
The Tribunal then considered most comprehensively the case law both in the courts and the tribunal relating to the deductibility of outgoings pursuant to s 51(1) of the Act. As it will be necessary to refer to the Tribunal’s course of reasoning, based upon the authorities, before considering the applicant’s submissions that relevant error of law has been demonstrated, it is convenient, at this stage, to set out the terms of s 51(1). They are as follows:-
“All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.”
The Tribunal referred to cases dealing with the limitation on deductibility imposed by the words “incurred in gaining or producing” assessable income. It referred to the well-known passage from Ronpibon Tin NL & Anor v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57 where the High Court said:-
“... to come within the initial part of the sub-section 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.”
Reference was also made to the requirement that expenditure be “incidental and relevant” to the gaining or producing of assessable income (W Neville & Co v Federal Commissioner of Taxation (1937) 56 CLR 290 at 305) and to the discussion of this phrase in the judgment of Williams, Kitto and Taylor JJ in Lunney (at 497) where their Honours said:-
“... the expression ‘incidental and relevant’ was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section.”
Reference was also made to the further exposition of the phrase by the High Court in Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 where Gibbs CJ, Stephen, Mason and Wilson JJ said (at 586):-
“What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character, and generally to its connexion with the operations which more directly gain or produce the assessable income.”
It was noted that this statement emphasised the need to focus on what the majority in Lunney had referred to (at 497) as “the essential character of the expenditure”.
A further step in determining deductibility of expenses was described in the passage from the judgement of Hill J in Federal Commissioner of Taxation v Cooper 91 ATC 4396 at 4412 where his Honour said:-
“It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income, and to determine whether the outgoings (or where relevant the losses) are incidental and relevant to those operations or activities.”
The Tribunal also referred to the necessity, once it had been determined whether the expenditure had been incurred in gaining or producing the assessable income, of considering whether, if that be so, it was, nevertheless, of a “capital, private or domestic nature”. Considerations relating to the latter determination might, of course, overlap with considerations relating to the former.
After considering these general propositions the Tribunal considered in detail “the rule and reasoning in Lunney” as this case was said to be, in effect, the entry point to any understanding of the deductibility of travel expenses under s 51(1) of the Act. As it is a major contention of the applicant that the learned Senior Member misdirected himself as to the true effect of this decision, it is necessary to refer in some detail to the treatment of the case in the Tribunal’s reasons. The basic facts are simple and well-known. The taxpayer sought a deduction for the expenses of travel from his home in Sydney to his place of employment at Darling Harbour. The journey was an ordinary daily journey to work, the taxpayer not engaging in any gainful work at his home. The High Court, by majority (Dixon CJ, Williams, Kitto, Taylor JJ; McTiernan J dissenting), held that these travelling expenses were not deductible. In the case of Hayley, heard with it, the same conclusion was reached in relation to the travelling expenses of a self-employed person going from his home to his place of business. Dixon CJ, with some apparent reluctance, denied deductibility on the basis of established precedent rather than principle. However, the majority held that the expenses were not “incidental and relevant” to the gaining by Lunney of his assessable income. Their Honours said (at 498):-
“The question whether the fares which were paid by the appellants are deductible under s. 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer’s residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as ‘incidental and relevant’ to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is ‘incurred in gaining or producing the assessable income’ or ‘necessarily incurred in carrying on a business for the purpose of gaining or producing such income’. It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer’s income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.”
The Tribunal summarised the effect of this passage as being that the daily fares were not productive of assessable income, insofar as they were expended only so that the taxpayer might be placed in a position to undertake earning activities. This “did not satisfy the requisite proximity to the actual derivation of income to qualify the expense of such travelling as deductible”.
The Tribunal expressed the view that the reasoning of the High Court in Lunney “resulted in the finding that the expenses were not deductible because they did not fall within the positive limbs of the section”. It was also of the opinion that the Court had gone further in finding that “the expenses were properly characterised as private expenses, and thus also expressly excluded by the negativing aspects of the section”. Other references were made to passages from the majority judgment, the Tribunal summarising them as indicating that “[t]he outgoings were of a private nature because they were referable not to the employment or business of the taxpayers, but to a personal decision as to where to live”. I shall have occasion to refer in more detail to the judgment in Lunney later in these reasons.
The Tribunal noted that the earlier case of Federal Commissioner of Taxation v Green (1950) 81 CLR 313, although referred to in Lunney, had not been overruled. In view of this the Tribunal accepted that occasions could occur where travel expenses could be held to have been incurred in gaining or producing the assessable income but “not for the bare reason that such expenses enable income to be derived”. The implicit support of Green in Lunney made it clear that Lunney “did not rule that travel from a place of residence is, of necessity, private in nature”.
The learned Senior Member summed up his view as to the effect of Lunney in the following paragraph:-
“Thus it can be seen that, although the majority of the High Court ruled out the deductibility of expenses with respect to the ‘simple daily journey’ from home to work, it did not hold that all expenses incurred in travel, even from a residence, are necessarily non-deductible in all cases. This having been said, it is at the same time, however, a mistake to look upon Lunney too narrowly, namely, as a precedent ONLY with regard to the ‘simple daily journey’ from home to work. For it must be stressed that Lunney is above all else the source of the invalidity of a particular type of reasoning, namely, that an expense is incurred in gaining assessable income simply because it is a prerequisite to the earning of such income. In this respect Lunney is applicable to all cases.”
The Tribunal then considered the development of the law since Lunney. Particular reference was made to the judgment of Northrop J in Federal Commissioner of Taxation v Genys (1987) 17 FCR 495 at 498. As I shall consider this passage later in these reasons, it is convenient to set it out now.
“However, the general proposition laid down in Lunney (supra), notwithstanding that it remains good law, is not exhaustive. In Garrett v Federal Commissioner of Taxation (1982) 58 FLR 101; 82 ATC 4060, the Supreme Court of New South Wales constituted by Lusher J, held that it had no application to the following situations:
(a) where the taxpayer keeps necessary equipment or instruments at his home which he needs for the purpose of performing his work, and by reason of its bulk, such equipment needs to be transported by vehicle from the home to his place or places of work and where the equipment is used at home;
(b) where the taxpayer incurs expenses for travel between two places of business or work; and
(c) where the employment can be construed as having commenced at the time of leaving home.
A fourth situation, not enunciated in Garrett (supra), is where the taxpayer travels between home and shifting places of work, that is, an itinerant occupation.”
After expressing the view that the situations referred to were “probably better regarded as applications of rather than ‘exceptions’ to Lunney” because the cases establishing them had not used the reasoning explained to be invalid in Lunney, the Tribunal observed, with citation of authority, that “deductibility in situation (c) follows only upon the finding that the home is the ‘base of operations’ of the taxpayer … from which he or she travels to his or her other place(s) of work”. In such circumstances the cost of travel is deductible because the journey completes employment which has already been entered upon before the journey commences.
In relation to situations (b) and (c) the Tribunal observed that:-
“... situation (c), therefore, is in reality only a variation on the theme found in situation (b), namely that the expenses incurred in travel between two or more places of work or business are allowable deductions. What is not clear, however, at least from the above passage in Glenys [sic], is whether in situation (b) the same requirement exists (as in situation (c)) for a relationship or connection between the work carried out at both places. It is this question which is at the crux of the present matter, and which now requires resolution.”
The Tribunal restated the question as follows:-
“The Applicant in the present case, it is not disputed, has two places of income derivation. They are, however, entirely unrelated to each other. Moreover, the Applicant resides at one of those places. The question here, therefore, is: are the expenses incurred in travel between two places of unrelated income production, where one of those places is also the home of the taxpayer, allowable as deductions under s51(1)?”
The first part of the question was expanded by asking the subsidiary question “is the travel between two places of unrelated income derivation ‘incurred in gaining or producing’ assessable income?”. The Tribunal then proceeded to consider these questions in the next section of its reasons. I shall now consider this section, making some comments as I proceed.
This section is lengthy and contains a most comprehensive review of cases bearing upon the deductibility or otherwise of travel expenses. I shall not refer to all the cases. The main cases considered by the Tribunal were Green, Genys, Garrett and In Re The Income Tax Acts (1903) 29 VLR 299. It is the submission of the applicant that the Tribunal misdirected itself as to the effect of these cases upon the travel expense deductions sought by him. It is his submission that the misdirections occurred because the learned Senior Member adopted a view of the effect of the decision in Lunney which was wider than warranted, and that this in turn, led to his taking an unduly narrow view of the effect of those cases. In particular it led the Tribunal into placing too great an emphasis on whether the work that was carried out at the place of departure and the place of destination was “related”.
In Green’s case, decided before and not disapproved in Lunney, the taxpayer managed his affairs, which involved a number of income sources, from an office in his home in Brisbane. In Cairns and Townsville he owned properties which produced rental incomes for him. He travelled annually from Brisbane to those destinations to inspect the properties and carry out supervisory activities. The cost of such travel was allowed as a deduction by the High Court as it “was incurred in relation to the management of the income-producing enterprises of the taxpayer” (at 319). A deduction was therefore allowed in respect of travel between two places of work. The Tribunal expressed the view “that this case cannot stand for the more general proposition that the expenses of travel between any two places of business are deductible”. There was no conflict with the principle of Lunney because, in the Tribunal’s opinion:-
“In finding that it was ‘reasonably necessary to inspect and supervise’ the properties, their Honours were not claiming that the travel was merely an essential or necessary prerequisite to the earning of income.”
Rather the position was that the relevant travel was necessarily a part of the very operation by which income was earned. The deduction was allowed for this reason “and not because of any process of bare reasoning that asserted deductibility as a consequence of a mere causal connection”. Consequently “the deduction allowed in Green should not be seen as an ‘exception’ to the principles enunciated in Lunney”.
The Tribunal then considered the case of In Re The Income Tax Acts. This case was referred to by the majority in Lunney. The treatment of it by their Honours was regarded as important by the Tribunal in its assessment of the effect of Lunney outside the area of simple home to work travel. It is, therefore, necessary to consider how the Tribunal dealt with it in its reasons. The taxpayer lived on a property outside Melbourne where he conducted a grazing business. He was also a director of a number of companies based in Melbourne as a result of which he travelled to Melbourne, to attend company meetings. He claimed a deduction for those travelling expenses under a section of the then relevant legislation which allowed deduction for expenses which were “wholly and exclusively laid out or expended for the purpose of trade”. The Supreme Court of Victoria allowed the deduction, Holroyd J saying (at 304):-
“These [director’s] fees, like the profits of his [grazing] business, are part of his income, and the money which he employs in travelling up to Melbourne in order to earn them is expended for the purpose of enabling him to earn his income, and without paying those expenses, apparently, he could not earn it ... in my opinion the expenses of going and returning are both necessary for the purpose of earning the money.”
The Tribunal pointed out that this passage was the subject of criticism by the majority in Lunney, in that their Honours said (at 498):-
“Possibly, if the learned judge had been required to apply the provisions of a section similar in terms to s.51 he would have found great difficulty in saying that the expenditure had been ‘incurred in gaining or producing’ the taxpayer’s assessable income.”
The learned Senior Member drew a great deal from the treatment of this case in Lunney. In his view, it had a considerable bearing upon whether the expenses of travel by a taxpayer from one place of work to another place of work could be deductible under s 51(1). As the passage in which he sets out his reasoning in this regards provides a clear indication of his approach, it should be set it out in full:-
“The facts in In Re The Income Tax Acts and those of the present matter are substantially similar; this being so the inference contained in the passage from Lunney quoted directly above must be applicable. In expressing ‘great difficulty’ with the argument that ‘the expenditure’ (namely, the expenses there under consideration by Holroyd J, those of travelling from one place of income derivation to an unrelated other) was ‘incurred in gaining or producing’ assessable income, their Honours clearly indicate that the situation of travel between two places of income derivation is to be treated no differently from the situation of home to work travel as regards the invalidity of reasoning which asserts that without such travel the income (from the activities at both locations) could not be earned.
In other words, the expenses of travel between two places of income derivation are not ‘incurred in gaining or producing’ assessable income if the most that can be said about them is that they are precursory (in the sense of a causal chain), even necessarily prerequisite, to the activities at both places which more directly earn the assessable income; in short, if they do no more than place the taxpayer in the position to earn his or her assessable income at either location.
It is important to note that the above reasoning operates as a general proposition, without reference to whether the two locations or places of income derivation are related or unrelated. Practically speaking, however, where both the place of departure and destination are referrable to the self-same income earning operation (business or employment), this bare (invalid) reasoning will usually, although not always, be surpassed. This is because a division of the single income earning operation into different spatial locations (assuming this is found as a matter of fact) will ordinarily mean that the travel between the locations is itself part of the income earning operation, as it was in Green.”
It is convenient to mention, at this stage, that I have some difficulty in accepting that these fairly wide propositions as to deductibility of travel expenses between two places of earning can be derived from the High Court’s treatment in Lunney of the Victorian decision. I am not persuaded that either Holroyd J or the High Court attributed significance to the fact that the taxpayer conducted a grazing business at his home. It would appear that the question for the Supreme Court was whether travelling expenses to Melbourne in order to earn the director’s fees fell within the relevant provision of the Victorian Act as being “wholly and exclusively laid out or expended for a purpose of trade”. While the High Court were concerned to comment upon whether such expenditure could fall within the different provisions of s 51, in neither case does it appear to have been considered significant that the taxpayer also conducted a business at his home outside Melbourne. Accordingly, I cannot, with respect, see how the treatment of this case in Lunney can provide, in itself, any basis for determining deductibility of travel expenses between one place of business and another nor for the greater likelihood of deduction where a single income earning activity was conducted at two or more geographical locations. In my view, such matters did not arise for consideration in Lunney; nor were they the subject of obiter comment.
The Tribunal went on to consider what was said to be the analogous situation of the itinerant worker. Again, I would respectfully question whether the decision in Lunney can afford assistance in relation to the travelling expenses of persons properly described as itinerants. Indeed, Mr Payne could not be so described and cases that relate to this rather special situation cannot, in my view, be helpful in deciding the present case. However, in this connection it is necessary to consider, as did the Tribunal, the well-known passage from the judgment of Lord Wilberforce in Taylor v Provan (1975) AC 194 at 215 where his Lordship said:-
“It is only if the job requires a man to travel that his expenses of that travel can be deducted, i.e. if he is travelling on his work, as distinct from travelling to his work. The most obvious category of jobs of this kind is that of itinerant jobs, such as a commercial traveller. It is as a variant upon this that the concept of two places of work has been introduced: if a man has to travel from one place of work to another place of work, he may deduct the travelling expenses of this travel, because he is travelling on his work, but not those of travelling from either place of work to his home or vice versa. But for this doctrine to apply, he must be required by the nature of the job itself to do the work of the job in two places: the mere fact that he may choose to do part of it in a place separate from that where the job is objectively located is not enough.”
The Tribunal said of this passage:-
“His Lordship’s emphasis on ‘the job’ makes it clear that his reference throughout is to a single occupation or income producing activity and not to two independent occupations. The passage also makes clear that an occupation will not be regarded as divided into different spatial locations merely because some work is done here and some work there: the occupation must by its very nature involve different spatial locations.”
In evaluating this paragraph from Lord Wilberforce’s speech it is convenient to have regard to the fact that the issue in the case was whether Mr Taylor’s travelling expenses fell within a proviso to s 160(1) of the Income Tax Act 1952 (UK) which excluded from taxation “any money expended wholly, exclusively and necessarily in performing the duties of the office”. The passage quoted comes from a paragraph in which the following passage precedes it:-
“The relevant word for the purpose of this case is ‘necessarily’. It is a word which has a long history of interpretation and application. It does not mean what the ordinary taxpayer might think it should mean. To do any job, it is necessary to get there: but it is settled law that expenses of travelling to work cannot be deducted against the emoluments of the employment.”
The question in the case was whether Mr Taylor was required by the terms of his employment to undertake the travel in respect of which the expenses were incurred. He was employed in two countries by the employer organisation, Canada and England. The question was whether the travel expenses were deductible as being “necessarily” incurred in the performance of his duties of office. He only had one office and one job. The case did not involve any consideration of the situation that might apply if he were travelling from a place of one job to a place of a different job, in circumstances to which the section in question would, in any event, have no application. That being so, I find it difficult to attribute to the passage the extended operation apparently given to it by the Tribunal in the following proposition:-
“Where there is no relationship at all, however, between the income earning activities carried out at the place of work which is the point of departure and the place of work which is the point of destination, the requirement for the expense to be ‘incurred in gaining or producing’ assessable income will not be so readily satisfied. This is because it will be more difficult to demonstrate that the connection between the expenses of travel and the activities at each place which earn the assessable income goes beyond the fact that the former merely puts the taxpayer in a position to carry out, or enables, the latter.”
Whilst this may be so, as a broad proposition pointing to evidentiary problems that may arise in establishing a s 51(1) connection between travel expenditure and the gaining of the assessable income, I do not, for myself, see it as a proposition that can necessarily be derived from or have the authoritative imprimatur of the passage from Lord Wilberforce’s judgment.
The matters that I have discussed were said by the Tribunal to constitute “the necessary conclusions that are to be drawn from the High Court cases of Lunney and Green”. Before proceeding to apply these conclusions to the facts of the case, the Tribunal considered a number of cases which had been referred to in argument before it. It referred to them as “a long line of travel expenses cases”. This part of the reasons constitutes a most comprehensive review of decided cases, for the most part in the Tribunal. The learned Senior Member indicated that a number of them, decided since Lunney, applied that case on the basis that it related only to the “simple daily journey” from home to work. He criticised these cases for not taking sufficient account of the “wider impact of Lunney, namely, as authority for the invalidity of a particular line of reasoning”.
I do not propose to review the whole of the cases referred to by the Tribunal. It is apparent that there has been difference of opinion as to the underlying principles and reach of Lunney. One case, however, must be referred to specifically as the Tribunal’s discussion of it provided the occasion for considering and rejecting an argument put to the Tribunal on behalf of the appellant, which argument has been repeated in this appeal. The case is Case F 43 74 ATC 245. It involved a taxpayer who engaged in the business of growing strawberries at his home and who was also employed in a nearby city at a place to which he travelled from his home during the week. He also had a weekend job in the same city which involved him in travel from his home to the job in the weekends. He claimed the deduction of his travel expenses because his residence was a place of business. The deduction was denied by the Tribunal on the basis that the outgoings were of a private character. However, so far as the applicability of the first limb of s 51(1) was concerned, it made the following statement (at 247):-
“Travelling between places of concurrent employment stands in an entirely different light and the cost thereof, at least in ordinary circumstances, satisfied the test of sec. 51 ... It is true that such an expense is not incurred in performing the duties at either place of employment for which remuneration is received. Nevertheless ... it can be seen to be incurred ‘in the course of gaining or producing’ the sum of the income and to be ‘incidental and relevant’ to the derivation of the total income.”
A submission to this effect was made to the Tribunal on behalf of Mr Payne. The Tribunal rejected it on the basis that it was “no more than a sophisticated version of the line of reasoning which was rejected in Lunney”. It amounted to no more than an assertion that “the relevant income could not be earned from two sources without the travelling which occurs between those places”. The learned Senior Member said that this was “precisely the bare reasoning which Williams, Kitto and Taylor JJ in Lunney found was not sufficient for the purposes of deductibility”. He expressed the view that the adoption of this line of reasoning was inimical to pursuing the correct line of inquiry, which was the determination as to whether or not the travel expenses were connected with activities of the taxpayer which more directly produced assessable income. He expressed the view that, in accordance with Lunney, “the mere enabling, by travel, of the carrying out of a second income earning operation does not establish the requisite connection, and thus is not a sufficient basis for deductibility”. I shall return to this rejected approach later in these reasons.
The Tribunal also considered in detail the decision in Garrett. It will be remembered that Taxation Ruling IT 2199 was produced by the respondent as a response to that decision. It had been submitted to the Tribunal on behalf of Mr Payne that the decision in Garrett authoritatively covered his own situation entitling him to the travelling cost deductions that he sought. The Tribunal took a particular view of the decision, which enabled it to distinguish the case from the present one. As it is part of the appellant’s case on appeal that the Tribunal misdirected itself as to the effect of Garrett, it is necessary to set out the approach taken by the Tribunal in its reasons. The facts may be stated shortly. Dr Garrett resided with his family at premises in Greenthorpe in New South Wales. At those premises he conducted a farming and grazing property which produced considerable income. He had a medical practice at Caringbah in Sydney and he also carried out medical work at various medical centres around the State. Included in these was an emergency practice at Greenthorpe itself. Dr Garrett was an expert allergist and, on a fairly regular basis, attended various country medical centres, by invitation of the doctors who practiced in them, in order to provide specialist services. The doctor transported himself between Greenthorpe and the various country centres by a specially leased aircraft which was also used in connection with his farming activities. It was necessary for him to transport vaccines between Greenthorpe and the country centres in specially refrigerated conditions. This was possible on the aircraft but, apparently, would have been impossible on ordinary commercial flights. Dr Garrett claimed the expenses of his air travel. The Commissioner allowed the costs of travel between the various medical centres and also the costs relating to the farming activities. However, he disallowed the expenses representing travel from Greenthorpe to the other locations of medical practice. On appeal to the Supreme Court, Lusher J held that the disputed expenses were deductible under s 51(1) of the Act.
The Tribunal rejected the submissions made on behalf of Mr Payne that Garrett was, for practical purposes, indistinguishable from his own case. Despite the existence of the farming business at Greenthorpe where the doctor resided, the learned Senior Member characterised the case as one of an example of travel between two or more places of income production referrable to a single income producing operation, namely the carrying on of a medical practice. He said it was not “a case of travel between two places at which entirely discrete operations were carried out for the production of income”. The Tribunal said that aspects of Lusher J’s judgment indicated that “the medical activities carried out at the various locations were not separate ... [r]ather Dr Garrett’s practice was regarded as encompassing the activities carried out at each of the places where he consulted with patients”. This rationale is disputed by the applicant. I shall refer to Garrett later in these reasons.
It may be noted, that in argument before the Tribunal Mr Payne relied upon the following passage from the judgment of Lusher J “in support of the submission that travel between two places of work, even though they are unrelated, are deductible” (at 106):-
“On the other hand, where the travelling expenditure is incurred on journeys between different places of business or employment, the expenditure can be regarded as being a deduction within the subsection and this can be so even though one of the places of business may also by the home of the taxpayer, or the home can be so construed. (Re The Income Tax Acts (1903) 29 V.L.R. 298; Case B81 (1970) 70 A.T.C. 375; Case B107 (1952) 2 T.B.R.D. 536; Federal Commissioner of Taxation v. Green (1950) 81 C.L.R. 313; Federal Commissioner of Taxation v. Collings (1976) 10 A.L.R. 475 per Rath J.; Owen v. Pook [1970] A.C. 244; Taylor v. Provan [1975] A.C. 194, at pp. 215, 225.)”
The Tribunal expressed the view that this passage did not “resolve the question of travel between two unrelated places of income production”. The Senior Member pointed to ambiguity in the use of the words “different places of business or employment”. He also stated that, for reasons he had already given, reliance on the cases cited did not resolve the ambiguity as they represented “a fundamental departure from the position clearly laid down by the High Court in Lunney”.
At the conclusion of its consideration of the authorities, the Tribunal decided that the decision in Lunney could and should be extrapolated to situations where the relevant travel occurred between two places where income was derived. The learned Senior Member provided a summary of the results of his review of the authorities and his deliberations on the principles involved. It follows directly after his analysis of the decision in Garrett and his assessment of the passage from the judgment of Lusher J. It is as follows:-
“By way of summation, the following represents, in the view of the Tribunal, a correct portrayal of the interpretation given to the requirement that expenses must be incurred in gaining or producing assessable income, and its application to the question of expenses incurred in travel between two places of income production:
(i)The relevant focus for deductibility is on the activities that more directly produce assessable income. It is only if the impugned expenses are sufficiently ‘productive’ of assessable income, or in other words, ‘incidental and relevant’ to those more direct activities, that they will be deductible.
(ii)Expenses will not be ‘productive’ of assessable income, or ‘incidental and relevant’, in the required sense if they are, in a causal sense, no more than preliminary to or a prerequisite, even necessarily so, of the relevant activities, in other words, if they merely enable the taxpayer to earn the assessable income.
(iii)It follows that the expenses of travel between two places are not necessarily deductible merely because the taxpayer carries out income producing activities at each place. In particular, such expenses will not be deductible if no more can be said about them than that they put the taxpayer into the position to earn income at either location, or enable the taxpayer to have two sources of income.
(iv)A closer connection is required between the travel and each income earning operation, such as the fact that the travelling is, due to the nature of at least one of the occupations of the taxpayer, part of that very operation.
(v)Where both the place of departure and the destination are referable to the self-same business, employment or income earning operation or programme, it can be readily inferred that the travel is an aspect of the operations by which income is earned (although this is not invariably so). This is because the division of a single income earning operation into different spatial locations will ordinarily (but does not necessarily) imply that travel between the locations is a part of the operation itself. But where the point of departure and the point of destination are referable to two unrelated income earning operations the required connection will not be so readily demonstrable.”
I make the following comments. In this summary the Tribunal reviews a significantly large number of decided cases and seeks to distil from them some essential unifying concepts. The statement of the concepts is in less absolute form than might have been expected from the discussion which preceded it. However, it represents, as I read it, an attempt to produce in definitive form, a set of principles covering the whole field of deductibility of travel expenses “between two places of income production”. There is an element of danger in all such attempts. They tend to ignore the fact that the law develops on a case by case basis. The application to a particular case of principles arrived at through such a process of abstract reasoning, can result in a distorted appreciation of the facts in order to accommodate them to a preconceived conceptual framework. The bed of Procrustes provides the obvious analogy. Also, it may be noted that a comparison of this summary with the earlier statement by the Tribunal of the “question”, which I have set out above, indicates that the residence of the taxpayer at one of the places of business has ceased to be of importance. This is so, notwithstanding that the summary of principles owes it origin to “the position clearly laid down by the High Court in Lunney”. It is, with respect, difficult to divorce from any consideration of Lunney, the fact that the journey in question was clearly travel from the taxpayer’s home to his place of work.
THE TRIBUNAL’S CONCLUSIONS
Having set out this summary, the Tribunal disposed of the case in fairly economical fashion. It was indicated that the application of the principles operated to deny the deductions sought. There followed a short discussion of the facts. Income was earned by flying planes and farming deer. The relevant expenses were incurred in travel to the location where each of the activities were carried out. The Lunney principles denied deductibility because:-
“Given that on the facts as proved the travel of the Applicant does no more than put him in a position to earn his assessable income, in other words, does no more than enable him to carry on two income producing operations, to both farm and fly, the expense of such travel is not deductible.”
There is no other reference to the facts. Plainly the Tribunal’s decision was based purely on the fact that Mr Payne had two sources of income which were “unrelated”. It was not a case of “the division of a single income earning operation into different spatial locations”. The expenses claimed as deductible were incurred purely for travel between two places of discrete income derivation and were not connected with the earning activities conducted at either place expect insofar as travel was necessary to place the taxpayer physically and geographically in a position to conduct those activities. This was enough to decide the case. There was no reference, for instance, to the carefully contrived relationship between the flying schedule and the deer farming operations to enable both income producing activities to be carried on, although this had been accepted in the Tribunal’s findings of fact. There was no apparent consideration as to whether this might cause the activities to be “related”.
THE CASE ON APPEAL
I have already set out at the commencement of these reasons the two broad issues raised by the applicant in the appeal and have dealt with the second one. In relation to the first issue it is convenient to have regard to two of the grounds of appeal stated in the applicant’s notice of appeal which cover the range of arguments presented to me on his behalf. These are found in:-
“…
(c)The Tribunal should have held that the applicant’s expenses of travelling between two places at which he engaged in income producing activities were properly characterised as outgoings incurred in gaining or producing the applicant’s assessable income or were necessarily incurred in carrying on the applicant’s business for the purpose of gaining or producing income in terms of Section 51(1) of the Act;
…
(e)The Tribunal erred in concluding that the decision in Lunney & Hayley v FCT (1958) 100 CLR 478 precluded the applicant’s entitlement to a deduction under Section 51(1) of the Act in the circumstances where those decisions were concerned with the cost of taxpayer’s movement between a sole place of work and his home and did not answer the question of the relevance of expenditure to income earning activities where the travel in question was travel between two or more places of work or where the expenses had another purpose than providing for the taxpayer’s movement between home and work;
…
(i)The Tribunal erred in failing to follow the decision in Garrett v FCT (1982) 82 ATC 4060 (which was binding on the Tribunal) and hold that the applicant’s expenditure in travelling between his various places of work was eligible for deduction under Section 51(1) of the Act;”
The grounds of appeal in relation to Lunney and Garrett were not, in the ultimate, argued precisely as framed. The submission, incorporating reference to both cases, was that the Tribunal had read more into the decision in Lunney than it was properly capable of bearing and that its treatment of Garrett bore witness to that fact. It is convenient to commence consideration of the question whether the Tribunal’s decision involves error of law by considering its treatment of these cases, a matter to which I have already made some reference in my exposition of the Tribunal’s reasons.
Lunney was a simple case. It involved only a claim for deduction by the two taxpayers of their travelling expenses incurred on their daily journeys from their home to their work place. The case did not involve any considerations as to the deductibility of a taxpayer’s travelling expenses between two places of work. Nor did it involve the further refinement of travel between two places were by the taxpayer for working in the one business. However, the Tribunal, in essence, derived the formulations in its summary from that portion of the majority judgment which denied deductibility to the daily travel expenses on the basis that they were merely a prerequisite to the taxpayer’s earning of assessable income and were not “incurred in gaining or producing” it.
However, the earlier case of Green, not overruled by the majority in Lunney, provided an indication that travelling expenses to a workplace could be deductible if they were incurred in travel which formed part of the overall management and control of the taxpayer’s business. In such circumstances, the fact that they could also be described as expenses in relation to getting the taxpayer to a place where he was to engage in business activity did not deny deductibility. Green was travelling on business rather than to the place where business activities were to be engaged in. Green was very different from Lunney in that it involved travel which was different in kind from a daily journey from home to workplace. As the taxpayer operated from an office base in Brisbane where business activities were conducted, his travel to Cairns and Townsville for the purpose of undertaking the business activities of supervision and inspection of the income earning projects in those cities was travel between two places of business. This fact, in itself, clearly provided a point of distinction from Lunney and also brought into play other considerations relating to whether the travel expenses were incidental and relevant to the taxpayer’s gaining or producing of his assessable income.
I have already indicated that, in my view, the case of In Re The Income Tax Acts discussed in Lunney should not be regarded as extending its area of application. It was decided upon different legislation and there would not appear to have been any connection at all between the taxpayer’s income earning activities at his home and his earning of director’s fees in Melbourne. For practical purposes he was simply travelling from his home to a place of work.
I regard it as important in assessing the precedent value of Lunney to take fully into account the weight that the Court obviously gave to the private nature of the travelling expense. Irrespective of its non-deductibility because it was not relevantly incurred in gaining the assessable income, it was also seen by their Honours as having been incurred because of the taxpayer’s choice of his place of residence. He incurred the travelling expense as a result of living where he wanted. In such circumstances, in my view, considerable restraint must be exercised in extending the ambit of Lunney to cover other fact situations, especially where no question of travel from a home to a place of work is involved. I have already remarked upon the fact that the learned Senior Member, in the development of his reasoning as to the scope of Lunney, commenced by including the element of home to work travel but later discarded this element altogether in holding that Lunney controlled deductibility in relation to expenses of travel from one place of work to another.
It is also of significance that Northrop J, in his exposition of the principles in Genys, felt able to agree (at 498) with the comment of Lusher J in Garrett to the effect that “the general proposition laid down in Lunney” had no application “where the taxpayer incurs expenses for travel between two places of business or work”. Although a single business or source of income was involved in Genys, it does not appear that Northrop J attributed any particular significance to this. Indeed, it would appear that, had his Honour found that the taxpayer’s home was also a place of business he would, without more, have allowed a deduction for the expense of travel from the taxpayer’s home to her workplace. (See also per Rath J in Federal Commissioner of Taxation v Collings 76 ATC 4254 at 4261-4262)
I have already referred to the facts of Garrett. Lusher J held that Dr Garrett’s expenditures were incurred in travel between the different destinations on business. They were outgoings incurred in gaining and producing his assessable income. In allowing the deduction he said (at 108): “[t]he essential character of the expenditure was that it was part of the operations by which he earned his income, and was essential to the performance of them, there being no other practical or reasonable way of transporting himself and his vaccines”.
The Tribunal, in my respectful opinion, adopted too restricted a view of Garrett. The Senior Member considered that it was an example of a deduction being allowed for travel between different aspects or branches of the one business. In consequence of this, the case could not be regarded as any authority for the allowance of travel expenses when travel took place between “unrelated” places of business. I am satisfied, however, that Lusher J was not putting forward any such limited view. The various medical practices could reasonably have been regarded as different sources of income. In any event, his Honour obviously took into account the use of the aircraft for the grazing business, which had no relationship to the taxpayer’s work as a medical practitioner.
I am satisfied that Garrett can properly be regarded as an example of the deductibility of the expenses incurred by a taxpayer for travelling between several places of income derivation. His Honour, in the passage cited, expressly referred to “journeys between different places of business or employment”. Had his Honour considered that there was a distinction of significance between travel between places where unrelated businesses or employments were carried on and travel between places where the same overall business was carried on, it could reasonably be expected that he would have said so.
It is not without significance, in my view, that his Honour said in relation to s 51(1) of the Act (at 106):-
“There is obviously a range of cases between the case of the expenditure on the simple daily regular journey on the part of a taxpayer in getting to and from the place of work where, on arrival, he commences his work and in consequence begins and concludes the earning of his income and the variety of factual situations that may emerge in relation to expenditure on travel in the context of s. 51(1).”
It will be remembered, also, that his Honour’s ultimate finding was put in terms of “the essential character of the expenditure”, his Honour finding, as a fact, that it was “part of the operations by which he earned his income...”. To adopt the phrase used in IT 2199 the expenditure was “part and parcel of the income producing activities”.
Whilst I am not prepared to accept the appellant’s submission that the decision in Garrett is necessarily determinative of the decision in the present case, I am, nevertheless satisfied that the case provides a clear indication that the “prerequisite” principle of Lunney is not necessarily the deciding factor in situations of travel between different places of income derivation. The “essential character” of the outgoing, in such circumstances, must depend upon an appraisal of all the relevant facts of the case which can contribute to the proper characterisation of the expenditure. The ultimate question is one of fact, the determination of the decision maker being, to a large extent, dependent upon the impression made by the whole of the factual matrix in which the expenditure is incurred. Garrett is such a decision. It is not directly analogous to the present case. The circumstances of the doctor were such that it was necessary for him to charter a private plane (something which occurred only once in the present case) and the charter enabled the transport of his vaccines in conditions of refrigeration. Clearly enough, facts such as these, when considered in conjunction with the other facts relevant to the travel, assisted in the determination that the travel was on work rather than to work. It was factors of this kind which produced the decision. The taxpayer did not succeed simply because he was travelling between “related” rather than “unrelated” places of income derivation.
Considerations of this kind lead me to the conclusion that despite the intellectual rigour that the learned Senior Member has brought to his assessment of the cases, he has, ultimately, in the path he has followed from Lunney, been misled into making an unhelpful basic distinction between “related” and “unrelated” sources of income derivation. The emphasis placed upon this line of inquiry had led the Tribunal away from the application of s 51(1) in accordance with its actual wording.
The section does not speak of “sources” of income; it speaks of the “assessable income” which means, in accordance with the statutory definition appropriate to the years of income in question, “all the amounts which under the provisions of this Act are included in the assessable income;”. In the present case Mr Payne’s earnings in his employment as a pilot and from his business as a deer farmer combined to form his assessable income. The deductibility of his travel expenses depended upon the extent to which they were incurred in gaining or producing this composite income. I am satisfied that the reasoning in Lunney does not require that, in approaching this task, the decision-maker should, as it were, break the assessable income into its component parts and then apply the Lunney “prerequisite” test to each part. This is what the Tribunal has done in the present case. By doing so it has precluded itself from considering whether the taxpayer’s travelling expenses were relevantly incurred in gaining the whole of his assessable income. Indeed, in a passage from the Tribunal’s reasons to which I have already referred, the Tribunal expressed the view that it was wrong in principle to consider deductibility of travel expenses in relation to the totality of the assessable income, rather than in respect of individual sources of income. The Tribunal rejected this approach as being “no more than a sophisticated version of the line of reasoning which was rejected in Lunney”. I respectfully disagree. Whilst the mere fact that expenses are incurred by a taxpayer in travelling from one place where he derives income to another such place does not automatically entitle them to deductibility, the converse is equally untrue. The fact that such expenses can be regarded as putting the taxpayer into the position where he can earn at either of the places does not automatically mean that they are not deductible. It is the position of the travelling expenses in relation to the whole of the earning of the assessable income which must be considered in determining whether they fall within or without s 51(1).
I have come to the conclusion, despite submissions to the contrary on behalf of the respondent, seeking to uphold the approach taken by the Tribunal, that error of law has been demonstrated. As a result of the approach taken by the Tribunal it has precluded itself from considering the overall earning pattern of the appellant and the relationship of his travelling expenses to that pattern. It is clear that Mr Payne relied upon the close organisational connection between his flying duties and his earning activities at the deer farm. Reliance was placed upon the necessity to be at the farm as quickly as reasonably possible after the cessation of flying duties in order to undertake the personal involvement in the operation of the deer farm. The fact that some loss of income in his earnings as a pilot was involved in the flying of the particular routes which maximised time available for deer farming activities, together with the fact that the employment earnings were necessary for the financial operation of the farm were also relied upon as indicating the integration of the two income earning activities. Counsel for the appellant, indeed, spoke of the “synergy” between the operations which particularly required that the travelling expenses be not characterised merely as expenditure incurred to enable earnings to be made at either destination. It is also worthy of note that Mr Payne, in his witness statements, indicated that his residence at the deer farm was dictated by the necessity of the work to be performed by him there. He would have preferred to live elsewhere. This would, no doubt, be a matter to be taken into account in determining whether or not the reasoning in Lunney was applicable.
It was submitted on behalf of the respondent that the Tribunal’s decision was one of fact and that it is reasonable to accept that matters such as those to what I have just referred were taken into account in the decision. I do not think that this is so. The Tribunal’s clear rejection of any argument based upon the relationship of the travel expenses to the “totality” of the appellant’s earnings and the decision in the case being so patently dependent upon a characterisation of the travelling expenses as being incurred for the purpose of enabling the appellant to earn from “unrelated” sources of income, clearly indicates that these matters were not taken into account. Indeed, as I have earlier indicated, the Tribunal made no mention of them in stating its conclusions. In my opinion, in the determination of the essential nature of the travel expenditure, all matters bearing upon the interrelationship of the two earning activities and the part played in those activities by the necessity for travel between the places of earning required careful consideration. Indeed, the emphasis on the term “unrelated” is highly suggestive that significant aspects of the relationship between the two earning activities were disregarded.
In these circumstances, I am persuaded that relevant error of law has been demonstrated in the Tribunal’s decision. Accordingly it must be set aside.
Although the appellant’s statement of the first of the issues in this appeal, which I have set out earlier in these reasons, claims that the Tribunal erred in law in failing to determine that the applicant was entitled to deductions for the travel expenses, neither the notice of appeal nor the argument presented to me seeks that I do other than send the matter back to the Tribunal for reconsideration in the light of these reasons. Although there is no dispute as to the facts, their effect, when properly considered, in determining the deductibility or otherwise of the travel expenses involves questions of fact, degree and impression falling within the province of an original decision-maker. In these circumstances it is appropriate that the matter be returned to the Tribunal.
Accordingly, I make the following orders:-
The appeal be upheld.
The matter to be remitted to the Tribunal for reconsideration in accordance with these reasons.
The respondent to pay the appellant’s costs of this appeal.
I certify that this and the preceding twenty-nine (29) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.
Associate:
Dated: 2 July 1998
Counsel for the Applicant: Mr D.B. McGovern Solicitor for the Applicant: Locke O’Reilly McHugh Counsel for the Respondent: Mr S.W. Gibb
with Mr I.S. YoungSolicitor for the Respondent: Australian Government Solicitor Date of Hearing: 4 May 1998 Date of Judgment: 2 July 1998
0
8
0