Russell and Commissioner of Taxation
[2013] AATA 621
•30 August 2013
[2013] AATA 621
Division TAXATION APPEALS DIVISION File Number(s)
2012/0804-0812
Re
Mark Russell
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member G Lazanas
Date 30 August 2013 Place Sydney In each matter the objection decision is affirmed.
.......................................................................
Senior Member G Lazanas
CATCHWORDS
TAXATION AND REVENUE – income tax – deductions – self-education expenses – work expenses – home office expenses – depreciation – onus of proof – substantiation requirements –disallowance of PAYG credits claimed not reviewable – objection decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1936 s 175A
Income Tax Assessment Act 1997 ss 8-1, 40-25, 40-30, 900-15, 900-30, 900-110, 900-115, 900-120
Taxation Administration Act 1953 s 14ZZK, Sch 1 s 18-15
CASES
Perdikaris v Deputy Commissioner of Taxation (No 2) (2007) 67 ATR 825
Young v Commissioner of Taxation [2012] FCA 1098
Federal Commissioner of Taxation v Forsyth (1981) 148 CLR 203
Re Bradshaw and Deputy Commissioner of Taxation (1999) 41 ATR 1195
Re Hamed v Federal Commissioner of Taxation (2010) 76 ATR 649
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614Eldridge v Federal Commissioner of Taxation (1990) 21 ATR 897
SECONDARY MATERIALS
Taxation Ruling TR 93/30 Income tax: deductions for home office expenses
REASONS FOR DECISION
Senior Member G Lazanas
30 August 2013
INTRODUCTION
This case concerns assessments of income tax issued to Mr Mark Russell for the years ended 30 June 2002 to and including 30 June 2010 (the relevant years). That is to say, there are nine years under consideration.
Mr Russell, who worked as a network engineer, claimed deductions for self-education expenses and work-related expenses. The latter mainly consisted of home office occupancy and running expenses. Mr Russell also claimed deductions for depreciation of computer hardware and office furniture. A further issue was whether Mr Russell was entitled to claim credits for pay as you go (PAYG) tax for the relevant years.
The Commissioner disallowed all of these claims and Mr Russell objected to the assessments, but his objections were disallowed.
The question for the Tribunal is whether the Commissioner’s objection decisions are correct. I have concluded that they are because Mr Russell failed to discharge the burden of proof placed upon him by s 14ZZK of the Taxation Administration Act 1953 (TAA). Mr Russell failed to prove, on the balance of probabilities, that the assessments were excessive and to show what his “true tax liability” was for the relevant years.
THE ISSUES BEFORE THE TRIBUNAL
The only issues which Mr Russell pursued at the hearing related to whether he was entitled to claim deductions in the relevant years for work-related expenses, self-education expenses and for the decline in the value of certain depreciating assets. Accordingly, they are the only issues that are considered in detail in these reasons.
It is noted that Mr Russell abandoned his claims in relation to whether the Commissioner had properly excluded credits in respect of tax withheld from his salary and wages. In so doing, Mr Russell accepted that the claims for these credits under s 18-15 of Schedule 1 to the TAA did not form part of the assessments of income tax made by the Commissioner and, therefore, cannot be the subject of a valid objection by him for the purposes of s 175A of the Income Tax Assessment Act 1936 (ITAA 1936) as has been conclusively determined elsewhere (see, for example, Perdikaris v Deputy Commissioner of Taxation (No 2) (2007) 67 ATR 825).
Furthermore, Mr Russell did not object to the assessments on the alternative basis that his assessable income from salary or wages in the relevant years was no greater than the amounts paid to him, as was canvassed as a possible alternative course of action by Edmonds J in Young v Commissioner of Taxation [2012] FCA 1098. This latter issue was, therefore, not before the Tribunal for review and indeed, even if this had been raised, the paucity of evidence would not have allowed me to make any precise factual findings.
THE FACTUAL BACKROUND
Mr Russell is a self taught network engineer working in the IT industry. Relevantly, he was a director of Independent Service Provider Pty Ltd (ISP) between 24 April 2001 and 5 August 2005 and a director of Green Tree Frog Pty Ltd (GTF) between 17 March 2006 and 8 April 2009. These companies were involved in providing internet related services and support to a number of clients.
In February and March 2011, Mr Russell lodged personal income tax returns for the nine years ended 30 June 2002 to 30 June 2010, in which he:
(a)returned salary income from employment with ISP in the years ended 30 June 2002 to 30 June 2006 and claimed PAYG credits;
(b)returned salary income from employment with GTF in the years ended 30 June 2007 to 30 June 2010 and claimed PAYG credits; and
(c)made claims for various deductions including work-related expenses in each tax year.
Mr Russell claimed that tax was withheld from his salary and wages for the relevant years in the following amounts:
(a)$19,552 for the year ended 30 June 2002;
(b)$19,552 for the year ended 30 June 2003;
(c)$19,552 for the year ended 30 June 2004;
(d)$19,552 for the year ended 30 June 2005;
(e)$19,604 for the year ended 30 June 2006;
(f)$16,120 for the year ended 30 June 2007;
(g)$16,120 for the year ended 30 June 2008;
(h)$15,236 for the year ended 30 June 2009; and
(i)$12,804 for the year ended 30 June 2010.
Amongst other deductions, Mr Russell claimed deductions for the following amounts in the relevant years:
(a)$13,760 in “self-education expenses” for the year ended 30 June 2002;
(b)$13,890 in “other work related expenses” for the year ended 30 June 2003;
(c)$13,570 in “other work related expenses” for the year ended 30 June 2004;
(d)$13,970 in “other work related expenses” for the year ended 30 June 2005;
(e)$14,200 in “other work related expenses” for the year ended 30 June 2006;
(f)$13,675 in “other work related expenses” for the year ended 30 June 2007;
(g)$13,675 in “other work related expenses” for the year ended 30 June 2008;
(h)$13,675 in “other work related expenses” for the year ended 30 June 2009; and
(i)$15,206 in “other work related expenses” for the year ended 30 June 2010.
The deductions claimed for “other work related expenses” primarily related to home office expenses, namely, rent and electricity and gas as well as depreciation for certain assets.
Following an audit of his income tax returns for the relevant years, on 10 May 2011, the Commissioner issued an audit finalisation letter to Mr Russell including a summary of review outcomes and reasons for decision. The result of the audit was the disallowance of the PAYG tax withheld credits claimed for the relevant years and the disallowance of the deductions claimed in respect of self-education and work-related expenses and depreciation of items.
On 16 May 2011, Notices of assessment were issued by the Commissioner for the relevant years, with the exception of the assessment for the year ended 30 June 2002 which issued on 23 May 2011, with adjustments excluding the claims for the expenses and PAYG credits in the following amounts:
(a)$18,845.30 for the year ended 30 June 2002;
(b)$18,780.80 for the year ended 30 June 2003;
(c)$18,168.05 for the year ended 30 June 2004;
(d)$18,162.10 for the year ended 30 June 2005;
(e)$15,589.05 for the year ended 30 June 2006;
(f)$21,849.12 for the year ended 30 June 2007;
(g)$21,651.02 for the year ended 30 June 2008;
(h)$20,657.30 for the year ended 30 June 2009; and
(i)$17,161.71 for the year ended 30 June 2010.
On 29 May 2011, Mr Russell objected to the assessments for the relevant years.
On 30 November 2011, the Commissioner disallowed the objection and issued Mr Russell with a Notice of objection decision.
On 29 February 2012, Mr Russell applied to the Tribunal for review of the Commissioner’s objection decision.
THE LEGISLATIVE FRAMEWORK AND PRINCIPLES
The key taxation provisions relevant to this case are the general deductibility provisions as well as the substantiation provisions. There are also special rules in relation to determining deductions for depreciating assets.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relevantly provides as follows:
8‑1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
…
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
…
(b) it is a loss or outgoing of a private or domestic nature; or
…
(3)A loss or outgoing that you can deduct under this section is called a general deduction.
Work-related expenses such as self-education expenses and home office expenses are general deductions and deductible under s 8-1 of the ITAA 1997 where the principles governing their deductibility are satisfied. I will briefly set out the principles below in respect of home office expenses and self-education expenses after first setting out the statutory provisions regarding the substantiation rules for work expenses.
Division 900 of the of the ITAA 1997 sets out the substantiation requirements in respect of “work expenses” which are defined in s 900-30 to mean “a loss or outgoing you incur in producing your salary or wages”. Section 900-15 relevantly provides:
900‑15 Getting written evidence
(1)To deduct a *work expense:
(a) it must qualify as a deduction under some provision of this Act outside this Division; and
(b) you need to substantiate it by getting written evidence.
Subdivision 900‑E tells you about the evidence you need.
Subdivision 900-E is directed towards the written evidence required for the purposes of s 900-15. Section 900-105 explains that the following sections have a set of rules for a particular way of getting written evidence to substantiate a deduction and the rules that can be used depend on the type of expense. Section 900-110 provides that there is no time limit for getting written evidence of an expense (unless the expense is recorded by the taxpayer in specified situations), “[b]ut until you get written evidence of it, you are not entitled to a deduction for the expense”. Section 900-110(2) further provides that if “when you lodge your *income tax return for the income year you have good reason to expect to get written evidence of the expense within a reasonable time, you can deduct the expense without actually getting the evidence. But if you don’t get the evidence within a reasonable time, your entitlement to the deduction ceases...”.
Section 900-115 sets out a number of rules in relation to written evidence from a supplier, which covers any type of expense except the decline in value of a depreciating asset. Section 900-115 relevantly provides, as follows:
900‑115 Written evidence from supplier
…
(2)You must get a document from the supplier of the goods or services the expense is for. The document must set out:
(a) the name or business name of the supplier; and
(b) the amount of the expense, expressed in the currency in which it was incurred; and
(c) the nature of the goods or services; and
(d) the day the expense was incurred; and
(e) the day it is made out.
(3)There are 2 exceptions to these requirements:
(a) if the document does not show the day the expense was incurred, you may use a bank statement or other reasonable, independent evidence that shows when it was paid;
(b) if the document the supplier gave you does not specify the nature of the goods or services, you may write in the missing details yourself before you lodge your *income tax return for the income year.
…
The principles relating to the deductibility of expenses with respect to home offices are explained in a number of cases that have come before the Courts and the Tribunal including Federal Commissioner of Taxation v Forsyth (1981) 148 CLR 203 (Forsyth) and Re Bradshaw and Deputy Commissioner of Taxation (1999) 41 ATR 1195 (Bradshaw).
The general proposition is that, normally, expenses which relate to the use or ownership of a home have a private or domestic character and are not allowable deductions because the part of the house used for work purposes does not mean that it ceases to be part of the taxpayer’s home. The High Court decision in Forsyth considered the claims made by a barrister for a study that was used almost exclusively for professional purposes, namely, research and reading. Wilson J (with whom Mason J agreed) stated at 215 as follows:
... an important question is the relationship of the study and ancillary space to the house as a whole. There would appear to be complete integration, with no suggestion of any physical exclusivity. The study is indistinguishable from other rooms in the private living area of the house, and is so placed to the taxpayer’s bedroom that he finds it convenient to keep his clothes in the study and use it as a dressing room. The ancillary space for a desk, where the taxpayer often works, is downstairs at the side of the living room. It would seem to be intimately related, in a physical sense, to the life of the family... Resort to the house by clients and/or solicitors for the purpose of professional conferences is apparently so infrequent as to be immaterial.
In Bradshaw, Senior Member Burton stated at [11] that:
… The nature of the outgoings allowed as a deduction depends on whether the area used for work is regarded as a place of business. A doctor’s surgery attached to his or her home is an example of a place of business, in contrast with an area set aside by a taxpayer for business purposes purely as a matter of convenience... An example of the latter, is the home study of a barrister used for convenience for reading briefs and preparing a case, away from chambers.
In Taxation Ruling TR 93/30 Income tax: deductions for home office expenses (TR 93/30), the Commissioner points to the following factors at paragraph [5] as indicative, although not necessarily conclusive, of whether or not an area of a home has the character of a place of business:
·the area is clearly identifiable as a place of business;
·the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
·the area is used exclusively or almost exclusively for carrying on a business; or
·the area is used regularly for clients or customers.
In TR 93/30 the Commissioner further states at paragraphs [16]-[18] that if part of the taxpayer’s home qualifies as a place of business, the taxpayer may be able to claim a portion of the home office occupancy expenses incurred under s 8-1. The Commissioner states that the amount claimed depends on the circumstances of the taxpayer and that it will usually be calculated by apportionment of the total expenses incurred on a floor area basis.
The Commissioner also refers to circumstances where the taxpayer may be entitled to a deduction for the expenditure actually incurred through his or her income producing activities, such as electricity costs, which is additional to their private expenditure. These expenses are referred to as home office running expenses. (TR93/30 at paragraphs [19]-[20].)
Broadly, self-education expenses are deductible where the expenses have the necessary connection with the income earning activities of the taxpayer. For example, expenses on work-related courses for keeping up to date would ordinarily be deductible.
The special rules for deductions for depreciating assets are set out in s 40-25 of the ITAA 1997 which relevantly provides:
40‑25 Deducting amounts for depreciating assets
You deduct the decline in value
(1)You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year.
Note 1:Sections 40‑70, 40‑72 and 40‑75 show you how to work out the decline for most depreciating assets. There is a limit on the decline: see subsections 40‑70(3), 40‑72(3) and 40‑75(7).
Note 2:Small business entities can choose to both deduct and work out the amount they can deduct under Division 328.
Note 3:Generally, only one taxpayer can deduct amounts for a depreciating asset. However, if you and another taxpayer jointly hold the asset, each of you deduct amounts for it: see section 40‑35.
Reduction of deduction
(2) You must reduce your deduction by the part of the asset’s decline in value that is attributable to your use of the asset, or your having it *installed ready for use, for a purpose other than a *taxable purpose.
Example:Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the income year.
If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of $1,000).
...
Meaning of taxable purpose
(7)Subject to subsection (8), a taxable purpose is:
(a) the *purpose of producing assessable income; or
(b) the purpose of *exploration or prospecting; or
(c) the purpose of *mining site rehabilitation; or
(d) *environmental protection activities.
Note 1:Where you have had a deduction under this Division an amount may be included in your assessable income if the expenditure was financed by limited recourse debt that has terminated: see Division 243.
Note 2:When this Division notionally applies under section 355‑310 (about depreciating assets used for R&D activities), the taxable purpose is sometimes only the purpose of conducting R&D activities.
…
Section 40-30 of the ITAA 1997 defines a “depreciating asset” as follows:
40‑30 What a depreciating asset is
(1)A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except:
(a) land; or
(b) an item of *trading stock; or
(c) an intangible asset, unless it is mentioned in subsection (2).
(2)These intangible assets are depreciating assets if they are not *trading stock:
(a) *mining, quarrying or prospecting rights;
(b) *mining, quarrying or prospecting information;
(c) items of *intellectual property;
(d) *in‑house software;
(e) *IRUs;
(f) *spectrum licences;
(g) *datacasting transmitter licences;
(h) *telecommunications site access rights.
…
There are various calculations relevant to determining deductions for depreciating assets set out in the ITAA 1997, however, it is unnecessary to separately refer to these.
Section 900-120 of the ITAA 1997 provides the following set of rules for substantiating depreciating asset expenses:
900‑120 Written evidence of depreciating asset expense
(1)You may use this set of rules only for a *depreciating asset expense.
(2)You must get evidence of the original acquisition of the *depreciating asset. It must be a document that you get from the supplier of the asset and that specifies:
(a) the name or business name of the supplier; and
(b) the cost of the asset to you; and
(c) the nature of the asset; and
(d) the day you acquired the asset; and
(e) the day it is made out.
(3)However, if the document the supplier gave you does not specify the nature of the asset, you may write in the missing details yourself before you lodge your *income tax return for the income year in which you first claim a deduction for the decline in value of the asset.
(4)If you don’t get the document in time, for example because you only decided to use the asset for income‑producing purposes several years after you acquired it, there are rules that might help you in Subdivision 900‑H (Relief from effects of failing to substantiate).
…
THE TAXPAYER’S BURDEN OF PROVING AN ASSESSMENT IS EXCESSIVE
Under the TAA, a person who is dissatisfied with an objection decision that is a reviewable objection decision may apply to the Tribunal for a review of the decision. In relation to the burden of proof in respect of proceedings, s 14ZZK(b) of the TAA relevantly provides that when the Tribunal reviews an objection decision of the Commissioner, the taxpayer, being the person applying for review has the burden of proving:
(i) if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; or...
The Tribunal’s summary in Re Hamed and Federal Commissioner of Taxation (2010) 76 ATR 649 set out below, is helpful as to the law regarding the heavy burden faced by taxpayers in proving that an assessment is excessive:
[7] Almost 60 years ago the High Court explained in George v FCT (1952) 86 CLR 183 at 201, referring to authorities going back as far as 1918, that:
... the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income ...
[8] As Brennan J put it in FCT v Dalco (1990) 168 CLR 614 at 621, 20 ATR 1370 at 1373, 64 ALJR 166 at 168, 90 ATC 4088 at 4091, 90 ALR 341 at 344:
... the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act.
[9] (When both George and Dalco were decided the “burden of proof” provision was in s 190(b) of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936), but it was in identical terms to the current TAA provision.)
[10] In a sales tax case dealing with what are now the uniform burden of proof provisions in Pt IVC of the TAA (s 14ZZK for tribunal reviews and s 14ZZO for Federal Court appeals) – “uniform” in the sense that they apply to reviews and appeals in relation to virtually all of the taxation laws administered by the Commissioner - Hill J said in Vale Press Pty Ltd v FCT (No 2) (1994) 53 FCR 92 at 99, 29 ATR 207 at 213, 94 ATC 4587 at 4592, 124 ALR 210 at 216, after referring to George, Dalco and also McEvoy v FCT (1950) 9 ATD 206:
... the word “excessive” requires that the taxpayer show that the assessment made by the Commissioner exceeds some nominated figure being the taxpayer’s liability.
[11] His Honour noted later (at FCR 99-100; ATR 214; ATC 4592-4593; ALR 217), that the obligation on a taxpayer to show not only in a conceptual sense that an assessment is excessive, but also the true extent to which it is excessive (by establishing the taxpayer’s correct taxable income), is not confined to the case of a default assessment, that having also been the view of the Supreme Court of New South Wales in Black v FCT (1986) 17 ATR 331, 86 ATC 4113.
[12] What this means for the current case is that the taxpayer must prove, on the balance of probabilities, what were his “actual taxable income” and, from that, his “true tax liability” for the relevant years. If, but only if, the actual taxable income and the consequent true tax liability are less than the corresponding amounts assessed to him by the Commissioner, he will have discharged the burden placed upon him by s 14ZZK(b)(i) of the TAA.
The Tribunal’s task in relation to review of the Commissioner’s objection decision (by a Court, although similar principles apply to a Tribunal) was explained in the decision of the Full High Court in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 where Brennan J observed (at 621):
It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
The Tribunal’s task when reviewing the Commissioner’s objection decision has substantially remained the same. As also observed by Foster J in Eldridge v Federal Commissioner of Taxation (1990) 21 ATR 897 (at 912):
It is abundantly clear, of course, that even though the Tribunal does over again the work of the Commissioner, it does it in a significantly different way. Although it could be said to be part of an administrative hierarchy, its functions partake far more of the court than of the office desk.
It is clearly not cast in the role of the inquisitor. Although it does not act within the confines of formal pleadings, it is constrained in its inquiries and deliberations by the ambit of the taxpayer’s objections. Although it is not bound by the rules of evidence [s 33(1)(c)] in reaching its decision it must act upon the evidence which is placed before it.
It follows from what is set out above about the taxpayer’s onus of proof and the Tribunal’s task in reviewing the Commissioner’s objection decision that Mr Russell, as the taxpayer, must prove, on the balance of probabilities, what was his actual taxable income and the consequent true tax liability for each of the relevant years and, in addition, then demonstrate that that was less than the corresponding amounts assessed to him by the Commissioner. Only then will he will have discharged the burden placed upon him by s 14ZZK(b)(i) of the TAA.
Mr Russell sought instead to persuade me that he had provided the Commissioner with all the documents that the taxation officers had asked for, and that he had other documents at home too, but that he had never been asked for those documents by the taxation officers and had, therefore, not produced them. Even if that were the true position, it is inconsequential to proceedings brought under Part IVC of the TAA because the taxpayer’s onus is proving, as set out above, that an assessment is excessive, and documents are a necessary part of that, particularly where there are substantiation requirements for the claiming of deductions.
THE EVIDENCE OF MR RUSSELL
As noted above, Mr Russell lodged nine years of personal tax returns in early 2011. He stated that a friend, who is an accountant, helped him to complete the tax returns. He stated that his friend asked him the questions and Mr Russell answered them and that he “showed him the relevant documentation, bank statements, whatever else” at that time. Mr Russell was unable to show that “relevant documentation” to the Tribunal. Also, the accountant, who is no longer a friend of Mr Russell, did not provide evidence at the hearing nor was he asked to produce any documents that could assist the Tribunal.
Mr Russell was overseas in Cambodia while the Commissioner carried out the audit of his income tax returns. He stated that he instructed his friends where to find the documents in his house and to provide them to the Commissioner when they were requested. The Commissioner’s position, borne out by a number of letters that he wrote to Mr Russell, is that for a prolonged period of time, specific requests were made in respect of documents and materials to substantiate the expenses claimed and to validate the correspondence of those expenses to the claims. These requests were made as part of the audit process and then reiterated and made again as part of the objection process.
Mr Russell stated that as the Commissioner had not asked for specific documents, such as floor plans or photos, he did not provide them. However, a number of documents were submitted in support of Mr Russell’s position. These included a bundle of correspondence and bank statements, as well as credit card statements for various periods that fall within the relevant period. Mr Russell generally resorted to reliance on his credit cards for purchases of computer equipment and claims for depreciation of hardware and office furniture.
Mr Russell was given every opportunity to produce documentation or other evidence to support his claims and to show that the assessments were excessive. However, Mr Russell was unable to provide any specific details. For example, in relation to his claim for depreciation, he stated that anything referenced as “eBAY” and “Harvey Norman” in his credit card statements was computer-related. Mr Russell also claimed to have a pile of broken laptops and a room full of computer parts, but of themselves these things do not prove anything meaningful for the purpose of these proceedings.
In response to a question about his record keeping, Mr Russell stated:
I don’t keep good financial records, I just don’t throw anything out... I keep receipts, I keep bills, but no, they’re not in any spreadsheet or any order... they’re just kept.[1]
[1] Transcript 6 February 2013 p.24
In response to numerous questions from the Commissioner’s counsel about the requisite documents, namely, receipts and the like to substantiate his various claims for deductions, Mr Russell responded, as follows:
Has the ATO asked me for those documents? If so, then they would have been supplied to them. If not, then I’d have to go home and dig them out. That’s going to be my answer to every one of them. If the ATO has asked for them, they would have been supplied: if not, I can go home and dig them out right now.[2]
…
I’ve got documentation for everything. Unless the ATO has requested them then they’re at home, they’re not here.[3]
…
Give me a list of what you want, I will supply them for you.[4]
…
If you give me – you give me a list of what you want. Let’s adjourn, I’ll go home and I’ll bring a trolley full of stuff that high if you want it.[5]
[2] Transcript 6 February 2013 p.31
[3] Transcript 6 February 2013 p.51
[4] Transcript 6 February 2013 p.52
[5] Transcript 6 February 2013 p.56
Mr Russell went home during lunchtime on the day of the hearing to collect documents, but the documents later shown to the Tribunal were not of any assistance. Mr Russell was also given an opportunity to collate documents after the hearing (which he did not take up).
I find on the basis of the evidence provided that Mr Russell was earning a salary in the relevant income years and working in the IT industry. I also find that he was working from home. It is difficult, however, for me to make any specific findings in relation to his expense claims because, as explained below, I was not satisfied that Mr Russell produced the critical documents that were necessary to assist the Tribunal to verify the amounts that were claimed to have been incurred by him. The documents that were produced by Mr Russell were mostly irrelevant and his evidence was incoherent, primarily because it was lacking in any degree of particularity. Mr Russell had obviously taken little interest in his financial records and, as far as I could determine, he had made completely vague and unsubstantiated claims in his tax returns for the nine years in question.
I deal below with the different categories of deductions claimed by Mr Russell for the relevant years of income.
IS MR RUSSELL ENTITLED TO CLAIM A DEDUCTION FOR ‘SELF-EDUCATION’ EXPENSES?
Mr Russell was uncertain as to whether the amount of $13,760 which was claimed for self-education expenses in the year ended 30 June 2002 was for self-education expenses or home office expenses.[6] Mr Russell was only able to say in very general terms that he was always doing self-education because in the IT industry things change constantly and while I do not doubt his evidence on this aspect, it was nevertheless problematic. He said it could have been a Microsoft course, a Cisco course or a networking course but when asked about the written evidence from a supplier, such as an invoice, to meet the substantiation requirements of s 900-115(2) of the ITAA 1997, he could not point to any document. The Commissioner’s position and Mr Russell’s responses are summarised in the following exchange:
Are you able to indicate what courses you did in that tax year?---If I’m allowed to go home and consult my paperwork, yes. As I said, it was 11 years ago.
But you can’t identify documents in the room today that - - -?---I wasn’t requested to bring any.
Are you able to indicate any study you did that year how - - -?---Yes, if you allow me to go home and get the documents, I will provide them today.[7]
[6] Transcript 6 February 2013 p.27
[7] Transcript 6 February 2013 p.28
Mr Russell failed to prove that the deduction claimed for self-education expenses was actually incurred and, therefore, the deduction claimed cannot be accepted. In addition, Mr Russell failed to prove that any self-education courses in question, such as those that he mentioned that he may have undertaken in the relevant years, enabled him to maintain or improve his skills or knowledge and were, therefore, relevant to his income-earning activities with an IT company.
IS MR RUSSELL ENTITLED TO CLAIM DEDUCTIONS FOR DEPRECIATING ASSETS?
Mr Russell claimed $1,500 with respect to depreciation for each of the years ended 30 June 2003 to 2006 in respect of a laptop and office furniture including office chairs, computer racks and cabling. Mr Russell also claimed $541 and $676 for the years ended 30 June 2009 and 2010, respectively, for “total heating, cooling, lighting and depreciation of furniture expense”, although it was not clear what amount (if any) was referable to the claim for depreciation of furniture in those later years.
In an undated letter written by the accountant friend, on behalf of Mr Russell, to the Commissioner, it was claimed that the amount of $1,500 was spent each year on the same day, namely, 1 July 2002, 1 July 2003, 1 July 2004 and 1 July 2005 to acquire computers and office furniture. It was not surprising that this unusual pattern of spending was the subject of cross-examination. Unfortunately, Mr Russell could not provide an adequate explanation. He indicated that he hadn’t seen the letter before and didn’t know what documents had been provided to the Commissioner and to the Tribunal. He also confirmed that he would not have made the purchases on the first day of each of the four consecutive income years but that he would have bought things when he needed them throughout the year and, furthermore, he would have likely spent more than $1,500 each financial year. He acknowledged, therefore, that the amounts stated were not accurate but could not point to any documents showing the correct amounts. He said “I’d have to dig the receipts out but they’re at home”.[8]
[8] Transcript 6 February 2013 p.46
Mr Russell is not entitled to claim the deductions for the decline in value of depreciating assets. Mr Russell failed to prove that the asserted costs of acquiring the depreciating assets were actually incurred because Mr Russell could not produce to the Tribunal the relevant documents to substantiate the purchases. In addition, Mr Russell also did not establish that any such assets were used for the purpose of producing his taxable income within the meaning of s 40-25 of the ITAA 1997.
IS MR RUSSELL ENTITLED TO CLAIM DEDUCTIONS FOR HOME OFFICE OCCUPANCY EXPENSES?
Most of the claimed deductions in the relevant years by Mr Russell were in respect of home office occupancy expenses, referable to the rent that he paid for the terrace in which he resided and which he claimed was also his place of business.
Mr Russell stated that his home is a three bedroom terrace with a single entrance from the street. From the entrance, the first room off the hall was a room which he described as an office followed by a room described as a meeting area which then adjoins another room, which he described as another office. He said that these three rooms were the places used by him for business purposes. He stated there was a certificate on the wall with the company registration and a business registration. There was no external signage to his home. Mr Russell said he had a website which advertised his presence at that address.
With respect to the description of the rooms, Mr Russell stated that one room was full of servers and, therefore, there was considerable heat and noise in that room. That same room was also used for filing of papers and storage of computer components. He said that he worked from the other room and the third room was used for meetings. He said that he had two or three client meetings a week as most work was done on the telephone or online. In terms of working from home, Mr Russell stated that he was on call “24/7” and slept with a laptop beside his bed. The rooms used as bedrooms were upstairs.
Excluding the bathroom and kitchen, three out of the five rooms in the home were said to have been used for business purposes. This was at odds with statements previously made to the Commissioner where the claim had been made on the basis of 72% and later 66% of the floor area. Mr Russell was definite that his calculation was three-fifths of the floor area. His explanation for this discrepancy was that the wrong document had been sent by the accountant friend to the Commissioner.
There were more inconsistencies with Mr Russell’s evidence in relation to his home office expenses claims, namely, in relation to the weekly rent. He said that he paid $350 rent per week in the period 2002 up to about 2006 when it was then increased to $400 per week. The claim for deductions for home office expenses was completed in the “home office calculator” page of the Commissioner’s website using 52 weeks multiplied by $400 per week, for the 2010 tax return only. Peculiarly, however, the rent receipts that were in evidence for various periods ranging from May 2003 to February 2009 indicated a weekly rental of $350 per week which contradicted Mr Russell’s oral evidence.[9]
[9] Exhibit A2
It emerged from cross-examination that Mr Russell had an office at the business premises of ISP and that he would go into the office at least once a month and had a desk there which was empty. He acknowledged in cross-examination that it was more convenient to work at home than go into the office and explained “[w]e were selling telecommuting. It was one of our things, so I telecommuted”.[10] Mr Russell also confirmed that it suited him better to work from home and it was not a requirement of any term of employment that he did so.[11] Mr Russell also confirmed that when working for GTF, he worked from home all the time.
Although it was clear from Mr Russell’s evidence that he worked from home, and his evidence was supported by written statements from colleagues which were to the same effect, Mr Russell failed to satisfy me that the part of the home in question, being the three rooms downstairs claimed to be three-fifths of the floor area of his home (excluding the bathroom and kitchen), were properly characterised as a place of business. I was not satisfied, having regard to the relevant cases and the factors set out in TR93/30 referred to above, that any area in his home was clearly identifiable as a place of business and used exclusively or almost exclusively for his work activities. Mr Russell further failed to persuade me that the rooms were not readily adaptable for use for domestic purposes.
[10] Transcript 6 February 2013 p.69
[11] Transcript 6 February 2013 p.70
IS MR RUSSELL ENTITLED TO CLAIM DEDUCTIONS FOR HOME OFFICE RUNNING EXPENSES?
The claims made in relation to running expenses were for electricity and gas. Specifically, Mr Russell stated that he had half a dozen servers running from home and that he worked out the claim in the same way as for the rent, namely, as a percentage. It is highly likely, based on his evidence that his electricity and gas expenses were significantly higher on account of his working from home. However, under cross-examination, Mr Russell accepted that he had not used invoiced amounts but rather general estimates of his consumption of electricity and gas for each of the years in question in order to make his claims. The claims, in other words, had no relationship to the actual expenses as he produced no invoices or receipts from the suppliers.
Mr Russell is not entitled to the claimed deductions for the home office running expenses that have been excluded by the Commissioner. Mr Russell did not produce materials to verify what the expenses were. Mr Russell has, therefore, not satisfied the substantiation requirements set out in Division 900 of the ITAA 1997.
CONCLUSION
Mr Russell’s case failed, in the main, because he was unable to provide the critical documents that were necessary to assist the Tribunal and so he failed to discharge the taxpayer’s onus of proof as set out in s 14ZZK(b)(i) of the TAA. Therefore, Mr Russell has to wear the adverse consequences flowing from the evidentiary inadequacies of his case.
I affirm the objection decision under review in each matter.
I certify that the preceding 64 (sixty -four) paragraphs are a true copy of the reasons for the decision herein of Senior Member G Lazanas ........................................................................
Associate
Dated 30 August 2013
Date of hearing 6 February 2013 Date final submissions received 28 February 2013 Applicant In person Counsel for the Respondent Mr G O'Mahoney Solicitors for the Respondent ATO Review and Dispute Resolution Group
0
5
0