Lodge v. Federal Commissioner of Taxation.
72 ATC 4174
Judgment date: Judgment handed down 16 October 1972.
Mason J.: In her income tax return for the year ended 30 June 1971 Ann Margaret Lodge disclosed a gross income of $3,521 of which the sum of $2,937 was earned by way of commission in her occupation as a law costs clerk. Included in the deductions which she claimed was an amount of $647 expended in nursery fees for the care of her infant daughter Deborah who was born on 26 October 1968. Miss Lodge's taxable
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income as returned was $2,171. Her claim for a deduction of $647 was disallowed and she was assessed to tax on a taxable income of $2,818. She objected to the rejection of her claim to the deduction. The Commissioner having disallowed her objection, she has appealed to this Court.
In support of her appeal Miss Lodge gave oral evidence which I accept. The effect of her evidence was that the expenditure in question was incurred for the purpose of enabling her to devote time and attention to the preparation of bills of cost which she undertook mainly at home and for three weeks in the year at a solicitor's office. She worked under contract for a partnership known as Law Cost which prepared common law bills of cost for solicitors in Melbourne. She was not an employee of the firm and her remuneration was in the form of a commission of four per cent on profit costs.
In the year ended 30 June 1971 the appellant lived on her own in a flat in a suburb of Melbourne. The flat was sufficiently large to enable her to undertake her work there. The work involved an examination and analysis of solicitors' files. It is agreed that of the total sum expended on nursery fees an amount of $42 was referable to the period of three weeks during which she worked in the office of a solicitor and not at home.
The appellant said that she had hoped that she could do her work and earn a satisfactory income without sending Deborah to a child nursery. However, events proved that this was not possible. She found that Deborah, when not sleeping, demanded continuous attention and was a source of distraction, making it impossible for the appellant to devote herself to her work. The time available for work outside Deborah's sleeping hours was insufficient for doing the volume of work which the appellant wanted to undertake and which was necessary to enable her to earn a sufficient income. Accordingly, to enable her to do her work and do it efficiently, she placed Deborah in the child nursery. In July 1970 Deborah was placed in the nursery for two days a week and in August of that year until the end of June 1971 she was placed there for five days a week.
To qualify as an allowable deduction under sec. 51(1) of the Income Tax Assessment Act 1936-1971 it must appear that the item of expenditure was ``incurred in gaining or producing assessable income'' or was necessarily incurred ``in carrying on a business for the purpose of gaining or producing'' such income. The meaning of these expressions has been elucidated in a variety of cases, some of long standing. The expressions prescribe tests which are different, but the first expression covers almost all the ground occupied by the second (
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949). 78 C.L.R. 47 at p. 56, per curiam).
Mr. Aickin, Q.C. for the taxpayer has placed emphasis on the statements made in the decided cases which say that for an item of expenditure to fall within the first expression it must be incidental and relevant to the activities or operations carried on for the production of income. However, as Williams, Kitto and Taylor JJ. pointed out in
Lunney v. F.C. of T. (1958), 100 C.L.R. 478 at p. 497, these statements did not constitute ``an exclusive and exhaustive test for ascertaining the extent of the operation of the section''. As their Honours observed, this is made clear by the judgment of the Court in Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (supra, at pp. 56-57). The passage on which reliance was placed for the taxpayer in this case is: ``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end.'' But it is immediately followed by the observation: ``The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income.'' Later, it was said: ``In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''
The rejection in Lunney's case (supra) of the claim that the expenses of travelling between home and work was an allowable deduction was based on the proposition that it is not enough to show that the expenditure was an essential prerequisite to the
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derivation of assessable income. The decision denied the notion that an expense was incidental and relevant to the derivation of income merely because it was necessary in that sense. The decision turned rather upon a view of the character of the expenditure incurred.
This approach to sec. 51(1) is founded largely on the presence of the word ``in'' in the principal parts of the subsection. That this is so is appropriately illustrated by
Halstead (H.M. Inspector of Taxes) v. Condon (1970), 46 T.C. 289, a decision on a question arising under Sch. E to the Income Tax Act 1952 in circumstances similar to the present case. There it was held that a widower was not entitled to a deduction in respect of payments made to persons who minded his two children so as to enable him to perform his work and earn income. The relevant English provision was more narrowly expressed than sec. 51(1) because it entitled an employee to a deduction if he was necessarily obliged ``to expend moneys wholly exclusively and necessarily in the performance'' of the duties of his employment (Income Tax Act 1952, Sch. 9, para. 7). It was held that the taxpayer was not entitled to the deduction.
Megarry J. said, at pp.292-293 -
``The Commissioners considered and distinguished
Bowers v. Harding,  1 Q.B. 560; 3 T.C. 22 on the ground that an alternative course of action was there open to the taxpayer, whereas here the taxpayer had none. That case, however, deals only with the word `necessarily'. There is still the word `in' governed as it is by `wholly' and `exclusively'. Even if one accepts the highest degree of inevitability in what the taxpayer did, in no conceivable sense can the expenditure be said to have been incurred by him `in' the performance of his duties: it had nothing to do with the way in which he performed his functions as a clerk to the Borough Council.''
In the light of the authoritative observations concerning sec. 51(1) made by this Court in its earlier decisions I have no alternative but to arrive at the conclusion that the appellant's claim in this appeal cannot succeed. The expenditure was incurred for the purpose of earning assessable income and it was an essential prerequisite of the derivation of that income. Nevertheless its character as nursery fees for the appellant's child was neither relevant nor incidental to the preparation of bills of cost, the activities or operations by which the appellant gained or produced assessable income. The expenditure was not incurred in, or in the course of, preparing bills of cost.
If the appellant's case is approached on the footing that she was carrying on a business, because she was not an employee of Law Cost, the result in my opinion is no different. If it be correct to say, as I have held, that the expenditure was not incurred in preparing bills of cost, it follows in this case that it was not incurred in carrying on the business of preparing such bills of cost.
To this point I have not considered the question whether the expenditure was of a ``private or domestic'' nature. The relationship between the operative parts of sec. 51(1) and this exception has not been discussed at length. In this case the arguments were directed to the operative provisions rather than to the exception.
However, I should express my view that the expenditure in question was of a ``private or domestic'' nature and for that reason is excluded by sec. 51(1). In so saying I should make it clear that my view is consequential upon the earlier conclusion that the expenditure falls outside the general provisions of sec. 51(1) and there is accordingly no relevant reason for holding the expenditure to be other than private or domestic expenditure on the care of the appellant's child. I express no opinion on the question whether an expenditure which is incurred in gaining or producing assessable income may nevertheless be of a ``private or domestic'' nature.
Although the expenditure which the appellant incurred in placing her daughter in a nursery was necessary to enable her to earn her income, that, as I see it, is not enough to satisfy the requirements of the law as it is expressed in sec. 51 of the Act and as it has been interpreted.
In the result I dismiss the appeal and confirm the assessment.
Appeal dismissed. Assessment confirmed. Usual order for exhibits.