Vance v Commissioner of Taxation - [2004] FMCA 981

FEDERAL MAGISTRATES COURT OF AUSTRALIA

VANCE v COMMISSIONER OF TAXATION

[2004] FMCA 981

ADMINISTRATIVE LAW – Taxation – whether the Applicant can deduct from her assessable income reasonably incurred expenses for an unsuccessful campaign to become Mayor – whether Applicant was carrying on a business – whether that business was for the purpose of gaining or producing an assessable income – appeal dismissed.

Local Government Act 1993 (Qld)
Income tax Assessment Act 1997 (Cth)

FCT v Maddalena 71 ATC 4161; Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in Liq) (1990) 23 FLR 305; Morales v MIEA (1995) 60 FCR 550 at 560-562; Commissioner of Taxation v Pollo-Mounter (FCA, 10 November 1995, unreported); Harris v Repatriation Commission (2000) FCA 873

Applicant:

DIANE M VANCE

Respondent:

COMMISSIONER OF TAXATION

File No:

BZ 403 of 2002

Delivered on:

15 December 2004

Delivered at:

Brisbane

Hearing date:

29 April 2003

Judgment of:

Baumann FM

REPRESENTATION

Counsel for the Applicant:

Mr Horton

Applicant directly briefed Counsel

Counsel for the Respondent:

Mr Porter

Solicitors for the Respondent:

Australian Government Solicitor

ORDERS

That the Appeal be dismissed.
That any application for costs, by way of written submissions, be filed and served within 28 days.
That any written submissions in response to an application for costs be filed and served within 21 days thereafter.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BZ 403 of 2004

DIANE M. VANCE

Applicant

And

COMMISSIONER OF TAXATION

Respondent

REASONS FOR JUDGMENT

Introduction

The Applicant Diane Vance was an unsuccessful candidate for the position of Mayor in the Queensland local government elections for Thuringowa City Council, and seeks to claim a general taxation deduction of $37,244, which she says were necessarily incurred in a bona fide endeavour to be elected.

Decision

The decision under appeal affirmed the objection decision under review, and was made by a member of the Administrative Appeals Tribunal on 17 June 2002 (“the AAT decision”).
In this case, it is conceded by the Respondent Commissioner of Taxation, that the said AAT decision was determined on an erroneous basis and that the Respondent made an erroneous submission to the AAT “which lead the Tribunal into error”.
Furthermore, as a result of the Notice of Contention filed by the Respondent on 25 September 2002, and the further concessions on the operation of s.74A of the Income tax Assessment Act 1997 (Cth) (“the ITAA”), the issues for determination were significantly narrowed.
I was persuaded by Counsel for the parties that I should deal with this issue rather than to merely remit the matter back to the AAT for determination according to law, for reasons which will become apparent.

Issue

The only substantive issue to be determined is whether the Appellant can claim a general deduction under s.8-1(1) of the ITAA.
Section 8-1(1), which is the successor to s.51, prescribes that:-
“(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.”
The Applicant concedes that she is not entitled to a deduction under subsection 8-1(1)(a) of the ITAA.
Business is defined in section 995-1 as:-
“…business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”
Fundamental to the entitlement of this Application to claim a deduction for the election expenses is her need to satisfy me that:-
a)She was carrying on a business;
b)The business was for the purpose of gaining or producing her assessable income.

Does seeking election for Mayor constitute “carrying on a business”

The Applicant submits that:-
a)Because she can show that by becoming Mayor she would not become an employee of the City Council, she must by definition be a person carrying on a business;
b)The Council is a business (referring to the objects of the Local Government Act 1993 (see section 543 relating to the application of National Competition Policy Inter-governmental Agreements to “significant business activities of local government”), and therefore running for election as Mayor is carrying on business.
c)It is not fatal to the claim that the Applicant was a first time candidate. There must always be a “first time” in any business which has been commenced.
d)The High Court decision in FCT v Maddalena 71 ATC 4161 has been consistently misapplied by the AAT in a number of decisions.
In response to these submissions the Respondent contends that:-
a)There is no dichotomy in the ITAA which supports a view that if you are a not common law employee and you earn assessable income, that you must be carrying on a business.
b)The Council is not carrying on a business, but is governmental in character, but even if it was a business the fact that the Applicant was seeking election as a Mayor does not constitute “carrying on a business”.
c)The decision in Maddalena is merely authority for the proposition that if you don’t have a business then you can’t claim under the business deduction limb of s.8-1(1)(b). The Tribunal decisions which the Applicant says has been misapplied Maddalena, are distinguishable on their own facts.
In the applicable year of income, it is clear that in addition to income obtained as an employee of the Council, the Applicant also operated a Mosaic Art business for which a deduction of $730 was conceded by the Commissioner of Taxation. Taxpayers can generate assessable income from a number of different sources in any given year.
I am satisfied that being Mayor is a vocation or calling within the definition of s.995-1. Expenses necessarily incurred in carrying out those duties are claimable under s.8-1(1). Case N26 is of no real assistance to the Applicant because in that case the taxpayer had been a continuing member of the ACT Legislature. He was claiming conference expenses whilst a continuing member. The remarks by the members of the Board of Review merely assist in establishing that:-
“A political career in Australia when achieved as a party endorsed member of a local authority or State or Federal Parliament impresses us as a vocation.”
When this case was decided in 1981, perhaps there was not the number of independent candidates there are now. I see nothing significant in the assertion that a taxpayer may be “party endorsed”, but I think the use of the word “achieved” demonstrates that only when elected can a taxpayer be regarded as meeting the definition of “vocation”.
I agree with Mr Porter that whilst Local Government has many significant business activities (for example water supply and sewerage services for the Thuringowa City Council as set out in s.545 of the Local Government Act 1993 (Qld)), this does not mean they are businesses. Councils’ may broadly adopt community expectations of acting in a business like manner (e.g. offering an efficient service; reduce wastage of money etc), but they are governmental in character with core responsibilities in the management of ratepayer and State/Federal Government funds; making and enforcement of by-laws and the like.
Even if the Local Authority was carrying on a business, it does not follow that being a Mayor means the taxpayer so appointed is carrying on a business as a result. I have already indicated that I would find a person who has been elected Mayor, and who is not otherwise an employee, would fall within the definition of having a vocation for the purpose of s.995-1.
The AAT in Case U22 and Case S10 dealt with similar fact situations. In Case S10, the Board of Review disallowed a claim under s.51(1) for expenditure incurred in being re-elected as an Alderman of a City Council because:-
“the expenditure here was incurred, not in the performance of the taxpayers duties as an Alderman by which he earns his fees for attendances, etc, but in obtaining the appointment. We have already pointed out that we can see no relevant distinction between a first election and a re-election.”
In Case U22, the member of the AAT applied the decision in Case S10. The taxpayer in this case was also an unsuccessful candidate for a local council election. In Case U22, the Commissioner is recorded as having conceded that a deduction would have been allowed under s.51(1) if the Applicant had been successful, which the Member found “somewhat surprising”. The Member says (at 190) that:-
“The election expenses were incurred by the Applicant with the object of being elected to the municipal authority. If elected the Applicant would derive assessable income in respect of salary paid to an Alderman. The decision of the High Court in FCT v Maddalena 71 ATC 4161; (1971) 45 ALJR 426 deals with the same issue in the sense that in Maddalena’s case the taxpayer incurred expenses in seeking and obtaining a contract as a professional footballer. The expenditure incurred in securing new employment is neither incurred in gaining or producing the taxpayer’s assessable income nor necessarily incurred in carrying on a business within the terms of the second limb of s.51(1). The expenditure was incurred at a point too soon to be regarded as incurred in derivation of assessable income.”
This Court is not bound to follow the decisions of the AAT or the previous Board of Review. It is, of course, bound to apply the decision in Maddalena if relevant to the merits of this case. Mr Porter says the decision in Maddalena only becomes relevant if I am satisfied that the applicant was carrying on a business.
I have formed the view that the Applicant was not carrying on a business at the time she incurred the expenses seeking election. She may have been seeking to achieve a “vocation” but she had not done so at the relevant time.
I would not characterise her endeavours as the business of “seeking to provide political services”. Whilst Mr Horton (for the Applicant) said in reply that a “vocation and calling begin when we are moved to stand”. I cannot agree.
The extended definition of “business” in s.995-1 was clearly drawn to cover those occupations which are said to have not merely profit as a focus. Business is accused as being only profit driven. Professions, vocations and callings are said to have some additional “higher” motive.
Many might dispute these assertions, however what is clear is that a taxpayer cannot be said to have “a profession, trade, employment, vocation or calling” until the person has achieved the prerequisites for that position. A medical practitioner is not a medical practitioner until the person has completed all necessary studies, training and registration.
By analogy a Mayor is not a Mayor until elected.
Because I have found that the Applicant was not “carrying on a business”, she is unable to meet the requirements of s.8-1(1)(b) of the ITAA. Her claim for a deduction must therefore fail.
Although I am not required, for the purpose of this decision to analyse the decision in Maddalena, I at least observe that the case raised the following issue on its facts, namely:-
“Whether the taxpayer who earns his living as an electrician and as a professional footballer, is entitled to deductions under s.51 of the Income Tax Assessment Act for travelling expenses, and under s.51 and s.61A of the Act for legal expenses incurred by him in seeking and obtaining a new contract with a new club to play football.”
Menzies J said at 4163 that:-
“It is, I think, worthwhile looking at the taxpayer’s earnings as an electrician to illustrate what I regard as the decisive difference to be observed here. Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business. There is a difference of first importance for present purposes between an electrician who seeks work as an employee and an electrician who seeks contracts to do work as a principal. In the former case the electrician would not have a business; in the latter he would. In the latter, therefore, what he spent to obtain contracts to do electrical work would be properly regarded as an outgoing of his business. There is, however, a clear distinction between the two cases.”
The importance of this passage seems to me to be that if a person is carrying on a business, which involves obtaining contracts or engagements which will gain assessable income, then expenses incurred in carrying on that business are deductable under the second limb.
Because Ms Vance was not carrying on a business, the expenditure came “at a point too soon to be regarded as incurred in gaining assessable income”. See also the remarks of the Full Court in Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in Liq) (1990) 23 FLR 305 at 313, when dealing with s.51, where the Court says:-
“The language of the section introduces… an element of contemporaneity. Thus an outgoing may be precluded from deductibility if it be incurred at a point if it be incurred at a point too soon before the commencement of the business or income producing activity.”

Relief

I am satisfied that the claim for a general deduction by the Applicant for the election expenses cannot succeed. My reasons for so finding are different from the reasons of the learned Member, who both parties accept, made his findings on an erroneous basis.
It is well accepted that, on setting aside a decision of the Tribunal, a Court does not have a general power to substitute what it considers to be the correct decision in the circumstances. Ordinarily the finding of an error in law will result in the matter being remitted to the Tribunal for further determination. However, a Court should not remit a matter “when it would be manifestly futile to do so” (see Morales v MIEA (1995) 60 FCR 550 at 560-562; Commissioner of Taxation v Pollo-Mounter (FCA 10 November 1995, unreported); Harris v Repatriation Commission (2000) FCA 873).
This is a case where I am satisfied it would be futile to remit the matter to the Tribunal.
I will order that the Appeal be dismissed and that any application for costs shall be filed within 28 days, with the response to be filed 21 days thereafter.

I certify that the preceding thirty-four (34) paragraphs are a true copy of the reasons for judgment of Baumann FM

Associate:

Date: