Scott and Commissioner of Taxation

[2003] AATA 206

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2003] AATA 206

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2001/531-533

TAXATION APPEALS DIVISION		)
Re		CLARA SCOTT

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr B J McCabe, Member

Date4 March 2003

PlaceBrisbane

Decision The Tribunal sets aside the objection decision under review and remits the matter to the respondent for reconsideration in accordance with the Tribunal’s reasons for decision. 

....................(Sgd).....................

B J McCabe
  Member

CATCHWORDS

TAXATION – income tax – objection decision - loan – character of investment - whether expenditure “incidental or relevant” to the derivation of assessable income

TAXATION – income tax – objection decision - motor vehicle expenses – whether applicant is the owner or lessee of the motor vehicle – meaning of ownership

TAXATION – income tax – objection decision – computer and printer – depreciation – claim for cost of calculator

Taxation Administration Act 1953

Income Tax Assessment Act 1936

Lunney v FCT (1958) 100 CLR 478
Ure v FCT (1981) 81 ATC 4100
Case X84 (1990) 90 ATC 609
Re Scott and Commissioner of Taxation [2002] AATA 1158
Re Scott and Commissioner of Taxation [2002] AATA 1236

REASONS FOR DECISION

4 March 2003 Mr B J McCabe, Member  

Introduction

1.      The applicant, Mrs Clara Scott, seeks review of the Commissioner’s decisions on her objections to assessment in respect of the years of income ending 30 June 1993, 1994 and 1995. Mrs Scott claimed a deduction in respect of a payment she made to the CPS Credit Union in 1992. She also made a claim in respect of vehicle expenses arising out of her use of several motor vehicles during the period, and claimed depreciation in respect of a computer and printer. The applicant also made claims for deductions in respect of the cost of a calculator and the cost of manuals used by Justices of the Peace.

The Material Before the Tribunal

2. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975.. Mrs Scott also provided a bundle of receipts and invoices that related in particular to her claim in respect of the motor vehicle expenses. Mrs Scott gave evidence in person. She is a tax agent, and appeared on her own behalf. Mr Curran appeared on behalf of the Commissioner of Taxation, who is the respondent.

The Applicant’s Burden of Proof

3. The Commissioner relies on s 14ZZK of the Taxation Administration Act 1953. The section provides:

“On an application for review of a reviewable objection decision: …

(b)   the applicant has the burden of proving that:

(i)    if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; or …

(iii)  in any other case—the taxation decision concerned should not have been made or should have been made differently.”

It is therefore necessary for Mrs Scott to produce evidence or refer to legal arguments that suggest the objection decision is wrong.

The Payment to CPS Credit Union

4.      Mrs Scott and her husband purchased a number of rental properties in Canberra during the late 1980s. The properties were mortgaged. A loan of $7000 was taken out from CPS Credit Union in 1984. The amount was later increased to $20,000. Mrs Scott says the loan monies were used for investment purposes. Mrs Scott was a party to the loan agreement, or was in any event liable to repay the money.

5.      When she and her husband ran into financial difficulty, they sold the Canberra properties. Mr Scott went into bankruptcy. The Credit Union looked to Mrs Scott for repayment of the balance of the loan. It threatened her with bankruptcy proceedings. There was no dispute that a bankruptcy would have created real difficulties for Mrs Scott: if she was bankrupted, she could not practice as a tax agent. She also said she was concerned about her commercial reputation. She said in cross-examination that she was not convinced she owed the money, but felt she had no choice but to pay.

6.      The applicant instructed her solicitor to pay out CPS, and a cheque in the amount of $17,054.91 was sent to the credit union on 14 July 1992 in final settlement. The money was paid out of the proceeds of the sale of her Brisbane home. Mrs Scott says that amount was a loss which she is entitled to carry forward into the 1993-1994 year of income.

7. Mrs Scott must satisfy the requirements imposed by s 51(1) of the Income Tax Assessment Act 1936 (“ITAA36”). That section provides:

“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.”

8.      The Tribunal must examine the evidence and analyse the essential character of the expenditure (see Lunney v FCT (1958) 100 CLR 478). In particular, one must consider what the taxpayer in the circumstances is ascertained to have done in using and arranging for the use of the borrowed moneys: Ure v FCT (1981) 81 ATC 4100 at 4104 per Brennan J. The expenditure will only be deductible under the first limb of the sub-section if it “may properly be regarded as ‘incidental and relevant’ to the derivation of assessable income”: see Lunney at 496 per Williams, Kitto and Taylor JJ.

9.      There is no clear evidence as to what was done with the money advanced by CPS Credit Union. Mrs Scott referred to it being used for investment purposes, by which I assume she meant in connection with the purchase or upkeep of the rental properties. But her evidence was not clear on this point. I was left with the impression from the totality of her evidence that she was unable to pin-point the use to which the money was put. It is therefore impossible for me to characterise the expenditure of the loan money as being incidental and relevant to the derivation of assessable income.

10. Mr Curran said that even if the expenditure did fall within the first limb of s 51(1), the repayment of the money was a capital expenditure which fell within the exceptions in the second limb of the sub-section. He said the money was paid to preserve the applicant’s ability to earn assessable income, which would have been impossible in the event of bankruptcy. Mr Curran cited, inter alia, the decision of Deputy President McMahon in Case X84 (1990) 90 ATC 609. In that case, the applicant claimed a deduction in respect of the cost of defending criminal charges and deregistration proceedings (he was a medical practitioner). The Tribunal decided the costs were of a capital nature because they related to the cost of preserving the taxpayer’s “income earning structure”. I think the same can be said of Mrs Scott’s situation. The claim for a deduction in respect of the payment to CPS Credit Union was properly disallowed.

The Claim in Respect of Car Expenses

11. Mrs Scott has claimed the costs associated with operating a motor vehicle. The claims relate to several difficult vehicles: a Ford Cortina (Reg No RHD-754), a Mitsubishi Magna (Reg No 328-PVO) in the 1993-1994 year of income, and a Suzuki (Reg No 949-AES). There was also a claim made in respect of a Holden Commodore (Reg No 717-OZK). The Suzuki was registered in Mrs Scott’s name, as was (for a time) the Cortina. The applicant has claimed using the “cents per kilometre” method, one of four permitted methods under Subdivision F of Division 3 of Part III of ITAA36 (in respect of claims arising in the 1993-1994 years of income and earlier) and Division 3 of Schedule 2A of ITAA36 (in respect of subsequent years of income).

12.     The cents per kilometre method says the taxpayer must be the owner or lessee of the vehicle in order to claim a deduction. The Commissioner denies the applicant was the owner of any of the vehicles.

13.     The approach of members of the Scott family to motor cars has been discussed in several other decisions of the Tribunal: see, for example, Re Scott and Commissioner of Taxation [2002] AATA 1158 and Re Scott and Commissioner of Taxation [2002] AATA 1236. I explained there, in some detail, the reasoning that ought to be applied in cases such as this, and I adopt it in this case. Members of the family – particularly Mr Donald Scott and his son Andrew – acquired a number of vehicles which were then made available to other family members as part of a family arrangement. The Tribunal has concluded that most of the other family members could not be characterised as owners. I think the situation may be different here, at least in so far as the Cortina and the Suzuki were concerned. Both vehicles were registered in the applicant’s name. The respondent acknowledged there was a Suncorp insurance acceptance record in the name of the applicant in respect of the Cortina, and an RACQ reminder notice addressed to the applicant in respect of the Suzuki. There were some other documents relating to repairs of the Suzuki that referred to the applicant’s husband, but I accept the evidence of Mrs Scott that her husband was arranging for work done to the car on her behalf.

14.     While registration is not conclusive proof of ownership, Mrs Scott’s description in her evidence of the way she used the cars together with her account of how she came into possession of the Suzuki and the Cortina satisfied me that she was their owner in the relevant period. She must be permitted to make a claim as owner under the cents per kilometre method in respect of those two vehicles. The evidence in respect of the other cars is more equivocal. She was not registered as the owner of the vehicles, and I heard nothing to suggest she had anything more than a possessory claim over the vehicles. The vehicles were shared with the family.  She cannot make a claim in respect of the Holden and the Magna.

The Computer and the Printer

15.     The applicant has claimed depreciation of the computer and the printer at 36% per annum using the prime cost method. She had originally claimed depreciation at the rate of 20%, and that claim had been allowed.

16. There was no dispute the computer and printer were acquired to 13 March 1991. The date is significant because there was a change in the legislation that took effect from that date. Prior to its repeal by Act No 35 of 1992, s55 of ITAA36 required the Commissioner to estimate the effective life of the item and fix an annual depreciation rate. Section 54A, which applies to property acquired after 13 March 1991, permits the taxpayer to either adopt the Commissioner’s estimate of effective life or make his or her own estimate of the life of the property. The Commissioner determined a rate of 20% in Income Tax Order 1217. He says that rate must stand because the property was acquired before 13 March 1991. He says the taxpayer is not permitted to make an election in relation to computers and printers. I agree. Mrs Scott is limited to a claim of 20%.

The Other Expenditure

17.     Mrs Scott produced a document that confirms she purchased a calculator for $69.95 on lay-by from Officeworks. Although she did not have an original receipt, I accept she expended the money as she claimed, and she is entitled to a deduction. She also produced a copy of the cover of a manual she says in her evidence that she acquired for $12 from the Department of Justice. She says she became a Justice of the Peace (she told the Tribunal she scored 96/100 on the written test) because she thought it would be a useful service to offer her clients. It was acknowledged that she could not charge for those services, but I accept she saw the ability to witness documents and perform the duties of a Justice of the Peace as a means of generating goodwill and contact amongst her clients, and amongst potential clients. She should be allowed to claim a deduction in respect of that expenditure.

Conclusion

18.     The objection decision under review is set aside and the matter is remitted to the Commissioner for determination in accordance with these reasons.

I certify that the 18 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member

Signed:         Sarah Oliver
  Associate

Date of Hearing  18 November 2002
Date of Decision  4 March 2003
The Applicant Appeared in Person
Solicitor for the Respondent     Mr Curran, ATO Legal Practice