Vance v Commissioner of Taxation

[2005] FCA 1163

FEDERAL COURT OF AUSTRALIA

Vance v Commissioner of Taxation [2005] FCA 1163

TAXATION  - whether expenditure incurred in seeking election as Mayor is expenditure ‘necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income’ pursuant to s 8-1(1)(b) of the Income Tax Assessment Act 1997 (Cth)

Income Tax Assessment Act 1997 (Cth) s 8-1(1)(b), s 995-1
Income Tax Assessment Act 1936 (Cth) s 74, ss 51 and 64

Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 referred to
Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 referred to
Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161 followed
Case S10 (1985) 85 ATC 160 referred to
Case U22 (1987) 87 ATC 188 referred to
Federal Commissioner of Taxation v Riverside Road Pty Ltd (in liq) (1990) 90 ATC 4567 referred to

DIANE MARGARET VANCE v COMMISSIONER OF TAXATION

No QUD 16 of 2005

SPENDER J
24 AUGUST 2005
BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QUD 16 OF 2005

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN:	DIANE MARGARET VANCE APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	SPENDER J
DATE OF ORDER:	24 AUGUST 2005
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1.The appeal is dismissed.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QUD 16 OF 2005

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN:	DIANE MARGARET VANCE APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	SPENDER J
DATE:	24 AUGUST 2005
PLACE:	BRISBANE

REASONS FOR JUDGMENT

1. This is an appeal from the judgment of Baumann FM given on 15 December 2004  dismissing an appeal from a decision of the Administrative Appeals Tribunal (“AAT”) made on 17 June 2002.

2. In the year ending 30 June 2000 (“the income year”), the appellant was a candidate for the position of Mayor in the Queensland local government election for Thuringowa City Council. She was unsuccessful.  In her income tax return for the income year, she claimed deductions pursuant to s 8-1(1)(b) of the Income Tax Assessment Act 1997 (Cth) (“the Act”) for amounts expended in her campaign on items such as printing campaign material, hiring contractors and motor vehicle expenses, totalling $37,244.

3. Section 8-1(1)(b) of the Act provides:

   ‘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.’

   Business is defined in s 995-1 to include ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.

4. On 3 May 2001, the respondent issued the appellant a notice of amended assessment in respect of the income year, disallowing election expenses of $36,244, being the $37,244 claimed less the $1,000 deduction allowed pursuant to s 74A of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”).

5. Pursuant to s 74 of the 1936 Act, expenditure incurred in the year of income by a taxpayer, in contesting an election for membership of the Parliament of a State or of the Legislative Assembly of either the ACT or the Northern Territory of Australia, is an allowable deduction. Section 74A of the 1936 Act, which concerns election expenditure by candidates for local government, provides that eligible election expenditure includes expenditure incurred by the taxpayer in the year of income in contesting an election for membership of a local governing body. Section 74A(2) provides that eligible election expenditure, subject to subs (3) of s 74A, is an allowable deduction. The effect of subs (3), however, is that the deduction allowable to a taxpayer under s 74A in a year of income in respect of expenditure incurred in respect of an election shall not exceed $1,000.

6. The appellant filed a Notice of Objection against the amended assessment on 20 May 2001.  By Notice of Decision dated 23 July 2001, the respondent allowed the objection in part, but only in relation to issues not presently relevant.  The Reasons for Decision that accompanied the Objection Decision indicated that no deduction was allowable for election expenses claimed in excess of $1,000 and confirmed the decision made on the audit of the taxpayer’s affairs.

7. On 21 September 2001, the appellant applied to the AAT for a review of the objection decision.  On 17 June 2002, a Member of the AAT affirmed the objection decision under review. On 22 July 2002, the appellant appealed.  The matter was transferred to the Federal Magistrates Court on 9 August 2002.

8. On 15 December 2004, Baumann FM dismissed the appeal on the grounds that the appellant was not carrying on a business at the time the expenses were incurred, and therefore did not satisfy the requirements of par 8-1(1)(b) of the Act.

9. The Court ordered that:

   ‘1.   The Tribunal’s decision be affirmed subject to the concessions made by the respondent in those proceedings, being:

   a.that an additional $459 should be allowed in respect of the research and consultancy business;

   b.that the applicant was carrying on a business in respect of mosaic art activities in the year in question and should be allowed a deduction of $730; and

   c.that the applicant demonstrated reasonable care in the preparation of her return in the year in question and as such the Commissioner considers that the penalty imposed under s226G of the Income Tax Assessment Act 1936 should be remitted.

   2.    The Appeal is otherwise dismissed.’

   His Honour noted:

   ‘3.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”.

   4. 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.

   5.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.’

   His Honour said:

   ‘…

   17.… 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.

   …

   21.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.

   22. 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.

   …

   26.Because I have found that the Applicant was not “carrying on a business”, she is unable to meet the requirement of s.8-1(1)(b) of the ITAA. Her claim for a deduction must therefore fail.’

10. The decision of the AAT referred to in par 1 of the Court’s decision was a decision to affirm ‘the objection decision under review subject to the direction that the respondent consider whether concessional provisions apply to the leave entitlements and long service payments received as resignation benefits’.

11. The Notice of Appeal contained three grounds. The sole ground pressed on the appeal was:

    ‘(b)That the decision of Baumann FM is wrong in law in that it is contrary to the statement of the relevant law regarding the ability of a taxpayer to claim deductions under s8-1(1) of the Income Tax Assessment Act 1997 as expressed by His Honour Mr. Justice Menzies of the High Court in the case of Federal Commissioner of Taxation v Maddalena 71 ATC 4161.’

12. The question for this Court on the appeal is whether Federal Magistrate Baumann erred in his finding that campaign outlays by the appellant were not incurred in carrying on a business for the purpose of gaining or producing assessable income.

13. In any given case, whether a business is being carried on involves questions of fact and degree, and will depend on a consideration of all of the circumstances surrounding the activities in question. In Martin v Federal Commissioner of Taxation (1953) 90 CLR 470, Webb J said at 474:

    ‘ … The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them …’

14. In Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540, Hill J said at 4555:

    ‘The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree.  Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.

    There is no one factor that is decisive of whether a particular activity constitutes a business. …

    Profit motive, scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on, repetition and a permanent character, continuity, and system are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.’ (Citations omitted.)

15. In this case, the appellant expended money on items such as printing campaign material, hiring contractors and motor vehicle expenses, with the object of being elected as Mayor.  As Mayor, she would earn assessable income.  The respondent submits that the appellant’s activities fail to demonstrate any of the usual indicia of business: her activities lack the colour of a business. I accept that campaigning for Mayor is not a business as defined in s 995-1.

16. The appellant relies on the decision of the High Court in Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161 (“Maddalena”) to support her contention that the expenses incurred by her in her attempt to be elected mayor constituted the incurring of expenditure in the carrying on of a business.

17. In Maddalena, the High Court (Barwick CJ, Menzies, Windeyer, Owen and Walsh JJ) was concerned with a taxpayer who earned his living as an employee electrician and as a professional footballer, who claimed deductions under s 51 of the 1936 Act for travel expenses, and under ss 51 and 64A for legal expenses, incurred by him in seeking and obtaining a contract with a new (i.e. different) Rugby League club. The High Court held that the occupation of a professional footballer vis-à-vis his club is as an employee, and that expenditure incurred by an employee in changing jobs or securing a new employment is neither ‘incurred in gaining or producing’ his assessable income, nor necessarily incurred in ‘carrying on a business’. Hence the claim for a deduction failed under both s 51(1) and s 64A of the 1936 Act.

18. The leading judgment was given by Menzies J, but there is an observation by the Sir Garfield Barwick which has a direct relevance in the circumstances of the present case.  Barwick CJ said at 4162:

    ‘… The cost to an employee of obtaining his employment does not form an outgoing incurred in the course of earning the wages payable in the employment. That cost is not deductible under sec.51 of the [1936 Act].’ (Emphasis added)

    By parity of reasoning, in my view the cost to a candidate of seeking to win the position of Mayor is not an outgoing incurred in the course of earning the income payable to a Mayor of a local government.

19. Menzies J said at 4163:

    ‘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 in 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.

    What I have said about the taxpayer as an electrician is, I think, equally applicable to him as a professional footballer, and moneys spent to obtain a new employment are not allowable deductions for income tax purposes under sec.51.  The claim for a deduction under sec.64A for legal expenses incurred “in carrying on a business for the purpose of gaining or producing assessable income” fails for the same reasons.’

20. The appellant interpreted part of this passage as authority for the proposition that the determinative indicia of carrying on a business is the incurring of outgoings with the purpose of obtaining assessable income.

21. The example given by Sir Douglas Menzies of outlays which are properly deductible is of an electrician seeking contracts to do electrical work as a principal.  The electrician is already qualified to do electrical work and is attempting to find work, work from which the electrician will earn assessable income.  That factual example is to be distinguished from the present case, where the appellant was attempting to be elected Mayor.  She was seeking to achieve a particular position from which she would thereafter derive assessable income.  Until that point when it is possible for her to derive income from that position, she is not carrying on a business.  Expending money in seeking to become Mayor is not expending money in the carrying on of the business of Mayor. 

22. In my view, the nature of the outgoings of the appellant in the present case is analogous to the outgoings incurred by a person seeking to become a qualified electrician.

23. In my opinion, even if the appellant had been elected Mayor, the expenses would still not have been deductible, as they would have been incurred at a point too soon to be incurred in carrying on a business for the purpose of gaining or producing assessable income. The expenditure was preparatory to the carrying on a business for the purpose of gaining or producing assessable income.

24. In Case S10 (1985) 85 ATC 160 (“Case S10”), the No 3 Board of Review disallowed a claim for expenditure incurred in being re-elected as an alderman of a City Council because the expenditure was incurred, not in performance of the taxpayer’s duties as an alderman but in obtaining the appointment.

25. In Case U22 (1987) 87 ATC 188, the Tribunal applied the decision in Case S10 to affirm the Commissioner’s disallowance of election expenses claimed by an unsuccessful candidate of a local council election. The Tribunal also relied on the High Court’s decision in Maddalena. The Senior Member said at 190:

    ‘Turning to subsec. 51(1) I have no doubt that Board of Review No. 3 was correct in its decision in Case S10 and that decision applies equally to the facts of this case. 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 FC of T 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 of employment as a professional footballer. The High Court held that such 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 subsec. 51(1). The expenditure was incurred at a point too soon to be regarded as incurred in derivation of assessable income.’

26. In Federal Commissioner of Taxation v Riverside Road Pty Ltd (in liq) (1990) 90 ATC 4567 the Full Court of the Federal Court (Northrop, Wilcox and Hill JJ) said at 4575:

    ‘The language of [section 51(1)] introduces … an element of contemporaneity. Thus an outgoing may be precluded from deductibility if it be incurred at a point too soon before the commencement of the business or income producing activity (F.C. of T. v Maddalena  71 ATC 4161; (1971) 45 ALJR 426; Lodge v F.C. of T. 72 ATC 4174; (1972) 128 CLR 171)…’

27. The language of paragraph 8-1(1)(b) of the Act requires the same element of contemporaneity, namely that the expenditure be incurred in carrying on a business for the purpose of gaining or producing assessable income.

28. In my judgment, FM Baumann was correct in concluding that the expenditure incurred by the appellant was not incurred in carrying on a business for the purpose of gaining or producing assessable income. 

29. The appeal should be dismissed.  I will hear the parties on costs.

I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.

Associate:

Dated:            24 August 2005

The appellant appeared on her own behalf
Counsel for the Respondent:	Mr David Boddice SC, with Ms Kerri Mellifont
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	7 April 2005
Date of Judgment:	24 August 2005