Scott and Commissioner of Taxation

[2002] AATA 1236

DECISION AND REASONS FOR DECISION [2002] AATA 1236

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2002/38

TAXATION APPEALS  DIVISION         )          
           Re      MARK EDWARD SCOTT
  Applicant
           And    COMMISSIONER OF TAXATION          
  Respondent

DECISION

Tribunal       Mr B J McCabe, Member  

Date29 November 2002

PlaceBrisbane

Decision      The Tribunal remits the objection decision under review to the respondent for reconsideration in accordance with the Tribunal's reasons for decision.     

..............................................
  Mr B J McCabe
  Member
CATCHWORDS
TAXATION – income tax – disallowed deductions – purchases and interest on credit card used for purposes of partnership; travel and motor vehicle expenses – whether deductions are allowable – whether work-related expenses

Income Tax Assessment Act 1936

Re Scott and Commissioner of Taxation [2002] AATA 1160
Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4634
Lunney and Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478
Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161
Ure v Federal Commissioner of Taxation (1981) 81 ATC 4100
Re Scott and Ors and Commissioner of Taxation [2002] AATA 778

REASONS FOR DECISION

29 November 2002 Mr B J McCabe, Member              

Introduction

1. Dr Mark Scott asked the Tribunal to review an objection decision made by the respondent. Dr Scott objected to the assessment issued in respect of the year ending 30 June 1995. The Tribunal has been asked to consider whether three different claims for deductions should have been allowed by the Commissioner.

2. Dr Scott claimed a deduction in respect of interest charges and some purchases made on his Commonwealth Bank Gold Mastercard. He says it was used by his father in connection with the business carried on by the family partnership. Dr Scott and his father were both members of that partnership. He also claimed motor vehicle expenses and some travel expenses.
   The Material Before the Tribunal

3. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975. Dr Scott gave evidence in person at the hearing, and his statement was tendered in evidence. Dr Scott was represented by his mother, Mrs Clara Scott. During the course of the hearing, Mrs Scott tendered some other documents, including correspondence from Dr Scott's employer. Mr Aftanas represented the Commissioner.
   The Facts

4. Dr Scott finished medical school in 1994. He was living in Sydney at the time. He was offered a position at the Princess Alexandra Hospital in Brisbane commencing on 5 January 1995. He received what should be characterised as a letter of appointment (it was not an offer, as it clearly indicated the applicant had already accepted the job) from Queensland Health dated 20 October 1994. The letter included a request in the following terms:

   "Sometime between the end of October and the end of December 1994 I would like you to meet with either myself, Dr Rogers, Deputy Medical Superintendent, or Dr Fitzhardinge, Assistant Medical Superintendent and ask that you arrange an appointment with us…"

1. The applicant flew to Brisbane on 7 November 1994 for a meeting as requested. He has claimed the cost of the airfare as a deduction.

2. The applicant also drove from Sydney to Brisbane in the Ford Falcon vehicle in his possession on 21 November 1994. The purpose of the trip was apparently to transport belongings to his parents' home in preparation for his permanent move to Brisbane. He says he was also under the impression that he needed to attend in person at the offices of the Medical and Health Practitioners' Board, which licences doctors to practice medicine in Queensland.

3. The applicant made another trip in his brother's vehicle from Brisbane to Sydney and back. The applicant and his brother left Brisbane on 10 December 1994. They stayed overnight in Tenterfield each way. The applicant says the trip was to collect more of his personal belongings.

4. The applicant also travelled to Sydney from Brisbane and back in April 1995. He says his purpose was to discuss partnership business in Sydney with his brother Christopher. In the course of his evidence, Dr Scott admitted he wanted to spend time with his brother and attend a wedding. I formed the impression this was principally a social trip, and that any discussion of the partnership's business was purely incidental to the real purpose of the journey. He made a further trip to Sydney in May to attend his graduation ceremony.

5. The applicant was in receipt of Austudy income while he was studying. He subsequently derived income from his employment as a doctor. Throughout this period, he had a car that was provided to him by his family. The first car was a Holden Commodore (registration number 717 OZK) acquired from his father in early 1994. Dr Scott gave it to his brother Christopher a few months later. The second car was a Ford Falcon (registration number 330 ACR). The Falcon was also provided to him by his father. Dr Scott gave it to his other brother, Andrew, in about June 1995. Dr Scott claimed he was the owner of both vehicles while they were in his possession. His claim for a deduction was based on the cents per kilometre method. That method requires that Dr Scott be the owner or the lessee of the vehicle in order to make a claim.

6. The cars were never registered in Dr Scott's name, although there was evidence (exhibit R3) that Dr Scott paid for the registration. I accept he paid for the maintenance of the vehicles. He did not purchase or lease the vehicles, and he gave them away to his brothers when he was finished with them. The applicant said he regarded the vehicles as a gift to him and felt free to dispose of them at any time, to other members of the family in particular – by way of sale or gift. In the event, he decided to make a gift of one vehicle to his brother Christopher, and another to his brother Andrew.

7. The applicant also gave a supplementary Mastercard (that is, a second credit card on his Mastercard account) to his father. Dr Scott says the card was for use in connection with the partnership business. He says it was his way of contributing capital – he gave the firm a line of credit, in other words. The evidence showed his father obtained cash advances on the card and made purchases. It was unclear from the evidence whether all of the purchases made by Mr Scott Snr were used for business purposes. The applicant also conceded he occasionally used the card for purchases of his own of a personal nature. He said it was sometimes unavoidable because shops did not always accept his Diners Card, the card he preferred to use for personal purchases.
   The Law
   (i) The claim for motor vehicle expenses

1. It is important to determine who owns a vehicle because only the owner or lessee of a vehicle can make a claim for vehicle expenses using one of the four approved methods of substantiation under the Income Tax Assessment Act 1936 (ITAA36). Those substantiation provisions can be found in Schedule 2A to the Act. Dr Scott chose to claim using the cents per kilometre method: see s 82KZBE and s 1-3 of Division 1 of Schedule 2A. (The same requirement was imposed in relation to tax years prior to the end of June 1994 in Subdivision F of Division 3 of Part III of the Act).

2. It is common ground Dr Scott was not a lessee of either vehicle, so he must establish he was the owner in each case. It is also accepted Dr Scott did not pay anything for the vehicles. His father gave them to him. He did not sell them when he disposed of them.

3. I discussed the concept of ownership at some length in Re Scott and Commissioner of Taxation [2002] AATA 1160. That case dealt with claims by Dr Scott's brother Christopher to deduct, amongst other things, motor vehicle expenses. Christopher was also a beneficiary of the Scott family's generous arrangements with respect to cars. As I noted in that case ownership is a difficult thing to define. The common law has never devised a clear definition – mainly because it didn't need to do so. Most of the remedies available at law were intended to protect possession. It is only when statutes occasionally use the word in the belief the concept of ownership is well understood that it becomes necessary to tackle the issue.

4. As I suggested in the earlier decision, the authorities do not present a clear picture of what ownership means. Most of the academic commentators have not illuminated the debate to any extent. Professor Welling, a noted Canadian scholar, is one exception. I settled on a tentative definition – perhaps working rule is the better expression - he devised in his book Property in Things in the Common Law System (Scribblers Publishing, Australia, 1996 at 35). His definition reads:

   "Ownership is a form of property in things. A holder of ownership of a thing either (i) holds possession of the thing which no one is at liberty to interfere with, or (ii) holds, or will when a contract expires hold, right to immediate possession of the thing, while someone else holds possession or right to immediate possession after transfer."

1. I said in that case (at par 19) I thought Professor Welling's definition was consistent with - and illuminates - the Federal Court's approach in Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4634. In that case, the Full Court said (at 4640) ownership might be regarded (depending on the context in which the word is used) as "the entire dominion of the thing said to be owned".

2. I explained in Christopher Scott's case that Professor Welling's approach required me to ask:

   "…whether Dr Scott had a form of possession with which no one could interfere. Alternatively, I could ask whether Mr Donald Scott, the person from whom Dr Scott took possession of the vehicle, had either a right to immediate possession of the vehicle or would have that right upon the expiration of some arrangement with Dr Scott?"

1. I concluded that Christopher Scott understood he had possession of the vehicles for the time being but knew that he was not entitled to treat them as if he owned them. He could not do all the things that one associates with ownership. In particular, it seemed clear from the evidence that his father ultimately had the right to reclaim possession of the vehicles if it suited him to do so. Although Mark offered a different account of the arrangement with respect to the cars in his possession (he said he understood he was at liberty to dispose of the vehicles if he wished to do so), I am not satisfied he was the owner of either car. Dr Scott received the cars as part of a benevolent family arrangement. He may well have been permitted to dispose of the cars, but that permission was to be given pursuant to the arrangement that existed. If the family (in particular, Mr Scott Snr) had concluded that another family member needed the car, I am satisfied that Dr Scott would – and arguably did – deliver up possession of the vehicles as directed.

2. In short, I am satisfied the ultimate right to possession of the vehicles in question lay with other members of the family, most obviously Mr Donald Sutherland Scott. Dr Mark Scott was not the owner since he did not have dominion over those vehicles. He cannot therefore make a claim for vehicle expenses using one of the four approved methods of substantiation. His claim for a deduction must fail. 
   (b) the claim for travel expenses

1. Deductions are dealt with in s 51(1) ITAA36. That sub-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."

1. The High Court explained in Lunney and Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478 that travel expenses were deductible under s 51(1) if they bore the essential character of an expense incurred in gaining or producing assessable income – as opposed to being incidental to the business, or even a prerequisite to the business. Williams, Kitto and Taylor JJ said (at 499):

   "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."

1. The reasoning relied upon in the joint judgment in Lunney has been criticised – most obviously by Dixon CJ in the course of his judgment in the same case (at 485-486). But that is the law. The approach was followed in Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161. In that case, Barwick CJ said (at 4162):

   "The cost to an employee of obtaining his employment does not form an outgoing in the course of earning the wages payable in the employment."

1. On that approach, the costs of the applicant's trips to and from Sydney for the purpose of moving his belongings and attending his graduation and speaking to the medical registration board cannot satisfy the requirements of s 51. I am also satisfied the trip to Sydney that was ostensibly to discuss partnership matters was not really a business trip - the partnership discussion, if it occurred at all, was incidental.

2. I am satisfied the trip to Brisbane to attend the meeting with the medical superintendent is different. Dr Scott had already accepted the job. It was not an expense incurred in connection with obtaining the employment. It was a requirement of the job he had agreed to accept. The costs of that journey are therefore allowable.
   (c) The claim for interest on the Mastercard

1. The High Court explained in Ure v Federal Commissioner of Taxation (1981) 81 ATC 4100 that claims for a deduction in respect of interest could only succeed where it is established the borrowed money was used for the purpose of gaining assessable income.

2. Dr Scott was unable to identify in detail which amounts were used for his private purposes and which amounts were used for the business. But the Commissioner says even those amounts incurred by Mr Donald Scott Snr were not properly characterised as a business expense because they were used to fund Mr Scott's salary. The Tribunal has already characterised those payments as drawings. I concluded in Re Scott and Ors and Commissioner of Taxation [2002] AATA 778 the payments were not salaries that could be treated as a deductible expense. Interest charges are not deductible where the loan to which they relate was used to fund drawings by other partners.

3. The Mastercard may also have been used to purchase items used in the business, but it is unclear what those purchases were. In the absence of appropriate proof, I am not satisfied the applicant has discharged the onus he bears under s 14ZZK.
   Conclusion

4. The objection decision under review is affirmed except in so far as it relates to the expenditure arising out of the journey to Brisbane for the purposes of the meeting  with the medical superintendent.

   I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member

   Signed:         .....................................................................................
     Associate

   Date of Hearing  7 October 2002
   Date of Decision  29 November 2002
   For the Applicant  Mrs C Scott
   For the Respondent                 Mr S Aftanas, ATO Legal Practice