The Commission of Taxation of the Commonwealth of Australia v Forsyth, N.H.M

[1980] FCA 58

Re: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: NEIL HARRY MARK FORSYTH (1980) 42 FLR 1
No. VG 42 & 43 of 1979
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Deane(1) and Fisher(1) JJ.

CATCHWORDS

Income Tax - loss or outgoing - deductibility of licence fee for use of study in residence - Income Tax Assessment Act, 1936 s.51

Income Tax - Loss or outgoing - Deductibility of licence fee for use of study in residence - Income Tax Assessment Act 1936 (Cth), s. 51.

HEADNOTE

The taxpayer and his wife bought a house as trustees of a family trust. The taxpayer and his wife, as trustees, agreed to allow the taxpayer to occupy one room in the house as a study in return for weekly payments of $20. The study was used for professional purposes connected with the taxpayer's practice as a barrister. The remainder of the house was used as the taxpayer's residence. The taxpayer sought to deduct the payments as, in effect, a licence fee for making a room available which was used for his professional work. The Commissioner disallowed the deduction. The taxpayer appealed to a Board of Review which decided that the payments were deductible. The Commissioner appealed to the Supreme Court of Victoria, which disallowed the appeal. The Commissioner then appealed by leave to the Federal Court.

Held, appeal dismissed, that the study was used by the taxpayer for the purposes of his professional practice, which produced assessable income. The payments to obtain use of it were therefore made for the purpose of producing assessable income; they were not of a capital, private or domestic nature. They were deductible under s. 51 (1) of the Income Tax Assessment Act 1936.

HEARING

Melbourne, 1980, March 12-13; May 5. #DATE 5:5:1980

APPEAL.

Appeal by the Commissioner against the decision of Murphy J. of the Supreme Court of Victoria dismissing the Commissioner's appeal against a decision of a Taxation Board of Review in respect of assessments for the years of income ended 30th June, 1974, and 1975. The facts appear from the judgment.

P. J. O.'Callaghan Q.C. and I. C. F. Spry Q.C., for the appellant.

B. J. Shaw Q.C. and R. Merkel, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: B. J. O'Donovan (Commonwealth Crown Solicitor).

Solicitors for the respondent: Whiting & Byrne.

J. H. TELFER

ORDER

1. Appeal dismissed.

2. Appellant to pay Respondent's costs of the appeal.

Appeal dismissed with costs.

JUDGE1

The Commissioner of Taxation appeals, by leave, from a decision of the Supreme Court of Victoria (Murphy J.) confirming a decision by a Taxation Board of Review that the respondent Neil Harry Mark Forsyth ("the taxpayer") was entitled to the benefit of a deduction pursuant to the provisions of the Income Tax Assessment Act, 1936 ("the Act") in the ascertainment of his taxable income of each of the tax years ended 30 June, 1974 and 30 June, 1975. The disputed deductions are in respect of payments made by the taxpayer for the occupation of "one room . . . and such ancillary space and facilities as he might reasonably require from time to time for the purpose of his professional practice as a barrister". The room in question was a room used, by the taxpayer, as a study in the Melbourne residence occupied by himself and his family.

The taxpayer is a member of the Victorian Bar. At relevant times, he carried on practice in Melbourne from city chambers. A large part of his practice consisted of advising work and he frequently worked at his home at night. Less frequently, he worked at his home on week-ends.

The taxpayer and his wife were, at relevant times, the trustees of a family trust. As such trustees, they purchased a house in Berry Street, East Melbourne. Completion of the purchase took place on 3 September, 1973 on which day the taxpayer and his wife moved into the house. Some two weeks before completion, the taxpayer and his wife had held a meeting as trustees at which they resolved, inter alia:
"3. It was agreed that the Trustees would permit N.H.M. Forsyth to occupy one room in the said premises as a study, together with such ancillary space and facilities as he might reasonably require from time to time for the purposes of his professional practice as a barrister; and that he would pay therefor the sum of $20 per week or such other sum as might be mutually agreed upon from time to time.

4. It was agreed that the Trustees would permit N.H.M. Forsyth to occupy the remainder of the premises as a residence upon the terms that so long as he was the occupier of the property:

(a) he paid all outgoings, and kept the premises in proper repair;

(b) he paid the interest under the said mortgage; and

(c) he made no demand for the moneys advanced by him to the Trustees".
An upstairs room in the house was designated as the taxpayer's study. Its furnishings included book cases in which the taxpayer kept a basic reference library. The "ancillary space and facilities" apparently consisted of an alcove on the ground floor of the residence in which a desk was placed.

No suggestion is made on behalf of the appellant Commissioner that the transaction between the taxpayer and his wife as trustee and the taxpayer in his personal capacity was other than genuine and effective. Indeed, it was conceded by the Commissioner that the taxpayer was a "tenant" of the room used as a study and that, pursuant to the arrangement set out in the above resolution of the trustees, he made payments of "rent" to the extent of $840 in the year ended 30 June, 1974 and $1040 in the year ended 30 June, 1975. Notwithstanding that concession, it would appear to be more accurate to describe the taxpayer as a licensee of the relevant room and facilities and to describe the fees which he paid as licence fees rather than rent. In addition to its use as a study, the subject room was also used by the taxpayer for keeping his personal clothing and as a dressing room. The primary use of the room was however by the taxpayer for the purposes of professional work and it is conceded by the Commissioner "that the relevant area was used entirely for professional purposes, that is to say, working on briefs, reading for legal purposes, and otherwise in relation to the taxpayer's practice as a barrister". This concession was stated, however, not to obscure the fact that the room was used by the taxpayer for the non-professional purposes mentioned and, at least in that regard, constituted part of his overall residence. The question involved in the appeal is whether the taxpayer was entitled to a deduction of the above amounts of $840 and $1040 in ascertaining the taxable income of the tax years in which they were paid.

Section 51(1) of the Act 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".

By s.6 of the Act, "business" is defined as including any profession. The taxpayer carried on his practice as a barrister for the purpose of earning assessable income. Plainly, for the purposes of s.51(1), the taxpayer, in carrying on his profession, carried on "a business for the purpose of gaining or producing such income". The issues between the taxpayer and the appellant Commissioner are whether the outgoings in question were incurred in gaining or producing the taxpayer's assessable income or were necessarily incurred in carrying on the taxpayer's "business" and, if they were, whether they were outgoings of a capital, private or domestic character.

The outgoings in question were incurred by the taxpayer as the price of his use of the study and ancillary space and facilities. It is common ground between the parties that that use was "for professional purposes, that is to say, working on briefs, reading for legal purposes, and otherwise in relation to the taxpayer's practice as a barrister". In the words of the resolution of the Trustees, it was "for the purposes of his professional practice as a barrister". In these circumstances it is clear that the relevant outgoings were both incurred by the taxpayer in gaining and producing assessable income and necessarily incurred in the course of carrying on his profession (i.e. "a business") for the purposes of gaining or producing such income. There remains for consideration the question whether the outgoings were of a capital, private or domestic nature and, for that reason, within the exclusion of the proviso to s.51(1).

For the Commissioner, reliance was placed upon the decisions of Walsh J. in Thomas v. Federal Commissioner of Taxation ((1972) 46 A.L.J.R. 397) and Mason J. in Federal Commissioner of Taxation v. Faichney ((1972) 129 C.L.R. 38). Those cases are, however, clearly distinguishable from the present case. In Thomas' Case (supra), the taxpayer, who was a barrister, sought a deduction in respect of part of the interest payable under a loan which had been raised and expended partly for the purpose of adding to his house a study which was devoted to use for professional purposes. In Faichney's Case (supra), the taxpayer, who was a scientist employed at a salary by the C.S.I.R.O, claimed a deduction in respect of part of the interest payable under a loan which had been raised and expended in the erection of a house containing a study used for the purposes of his work. The deduction in respect of a part of the interest was disallowed in both cases. In each case it was held that the outgoing claimed as a deduction was "of a capital, private or domestic nature" within the meaning of s.51(1). The study was part of the taxpayer's residence. The outgoing related to the erection or extension of the residence. It was of a capital, private or domestic nature regardless of whether the study was used, in the case of the barrister, for professional purposes or, in the case of the scientist, for the purposes of his work.

In Faichney's Case (supra), the taxpayer also claimed a deduction in respect of the cost of lighting and heating his study. The outgoing in respect of lighting and heating the study constituted part of a larger outgoing in respect of lighting and heating the residence as a whole. It was, however, possible to apportion part of that outgoing to lighting and heating the study and to isolate that part from the overall cost of heating the residence as a whole in a way which was not possible in the case of interest paid on moneys borrowed to enable the erection of the taxpayer's residence. Moneys paid on heating and lighting the study could be directly related to the use made of the study for the purposes of the taxpayer's work and therefore could not be characterized as of a private or domestic character. Outgoings by way of interest on money borrowed to enable the erection of the residence remained of a private or domestic nature even though they could in part be related to a separate section of that residence which was used for the purposes of the taxpayer's work. Mason J. held, that the deductions claimed in respect of lighting and heating the study were properly allowable under s.51(1) of the Act.

In the present case, the relevant outgoings were incurred in respect of the use by the taxpayer of the study and associated facilities for professional purposes. They did not, as in the above-mentioned cases, constitute part of a larger payment which could, in its entirety, be related to the taxpayer's purchase, erection or extension of his residence. No question of apportionment arises and it is not possible to characterize the outgoing in respect of which a deduction is claimed by reference to a larger outgoing of which it formed part. If the relevant outgoings are, in the present case, to be excluded from the provisions of s.51(1) for the reason that they are of a "capital, private or domestic nature", it must be because they are of that nature in themselves and not by reason of their constituting part of larger outgoings which can, in their entirety, properly be so described.

The outgoings in the present case were incurred as the cost to the taxpayer of using, for professional purposes, part of a residence held by the taxpayer and his wife as Trustees under a family trust. True it is that the study and those associated facilities can properly be regarded as part of the residence which the taxpayer and his family occupied. That is not, however, to the point in the present case for the reason that the payments were not related either to the residence as a whole or to the general use by the taxpayer and his family of that residence as their home. In this regard, the outgoings were more akin to the payment of the cost of lighting and heating the study in Faichney's Case (supra) than to the payment of part of the interest on the money borrowed to permit the erection of the house. They were specifically and genuinely for the use by the taxpayer of the study and associated facilities for professional purposes, that is to say, for the purpose of earning assessable income. They were revenue outgoings of a professional or business nature and were not outgoings of a capital, private or domestic nature. They were properly deductible pursuant to the provisions of s.51(1).

The Commissioner's appeals should be dismissed with costs.