91 ATC 412
Administrative Appeals Tribunal
Judgment date: 28 August 1991
Dr YFR Grbich (Senior Member): The case concerns the deduction of bridge tolls and parking expenses incurred by an employee in the course of carrying out his job and earning his assessable income. In particular, it concerns the construction to be given to s 51AF of the Income Tax Assessment Act 1936, which prohibits employees from claiming deductions ``in respect of a car expense'' for an employer-provided car.
2. The applicant is a sales representative. He works from a home office. For the year ended 30 June 1989 he claimed tolls of $450 for crossing the Sydney Harbour Bridge and
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parking fees of $2,048 incurred in a Sydney mid-city parking building. These deductions were disallowed. His objection dated 27 December was partially allowed by an amended assessment dated 4 October 1990. But objections on the two items before this Tribunal were disallowed.
3. There was an agreed statement of facts and the applicant elaborated on this in the witness box. His home was on the north side of Sydney Harbour and separated from the city by the Harbour Bridge. His sales territory was located in Sydney city. Though his employer did maintain a shop in the city, with facilities for sales representatives, adequate office space was not maintained on his behalf. He shared a city office with fifteen other sales representatives. This was, obviously, only a work station which enabled sales representatives to tie up loose ends while in the city. Under his contract of service, he bore his own office expenses. He was required to telephone clients, to keep records, to do some mailing and to store samples of sales stock. In practice, he would make contacts by telephone from his home office and go to the city on three days each week to follow up contacts with clients. He carried samples for clients and kept some of the larger samples in the car. In effect, the car became his ``office'' in the city. While he called at his employer's city premises for messages and to send items to the head office of the employer, this was not his main place of work.
4. I find that the employment of the applicant commenced in his home office. Expenses incurred for travelling to his city appointments would normally be covered by the deduction provisions. So much is clear from
FC of T v Wiener 78 ATC 4006. In this case the taxpayer was a teacher involved in a special pilot scheme to teach foreign languages at various schools. She kept up an office at home and travelled from that office to several schools and between schools. Smith J in the Supreme Court of Western Australia, held that travel expenses were deductible. The nature of the job itself made travel essential and the travel was a fundamental part of the taxpayer's work. The ratio decidendi of the decision, which applies a long line of authority, applies on the facts before this Tribunal.
5. The expenditures in this case, being deductible under the normal terms of the deduction provision in s 51, the issue is whether they are excluded by the terms of s 51AF. Section 51AF(1) reads:
``SECTION 51AF CAR EXPENSES INCURRED BY EMPLOYEE
51AF(1) [Deductibility] Where -
- (a) during a particular period, an employer provides a car for the exclusive use of a person who is, or of persons any of whom is, an employee of the employer or an eligible relative of such an employee; and
- (b) at any time during that period, the employee or an eligible relative of the employee is entitled to use the car for private purposes,
a deduction is not allowable under this Act in respect of a car expense that relates to the car and -
- (c) is incurred by the employee during that period; or
- (d) is incurred by the employee and is wholly or partly attributable to that period.''
6. The terms in s 51AF are specifically given the same meaning they have in Part III Division 3 Subdivision F by s 51AF(2). In particular, they incorporate the meaning of ``car expense'' from the substantiation provisions in s 82KT which reads:
``car expense' means an outgoing incurred in connection with a car and, without limiting the generality of the foregoing, includes -
- (a) an outgoing incurred in connection with the operation of a car;
- (b) expenditure incurred in connection with borrowing money for the purpose of acquiring a car;
- (c) expenditure (other than a payment of principal or interest) incurred in connection with the discharge of a mortgage given as security for -
- (i) the repayment of money borrowed for the purpose of acquiring a car; or
- (ii) the payment of the whole or a part of the cost of acquiring a car;
- (d) in a case where a car is leased -
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- (i) expenditure incurred by the lessee in connection with the lease; and
- (ii) without limited the generality of subparagraph (i), expenditure incurred by the lessee for the preparation, registration and stamping of the lease, or of an assignment or surrender of the lease;
- (e) a payment of interest on money borrowed for the purpose of acquiring a car or on the outstanding balance of the cost of acquiring a car;
- (f) expenditure incurred for repairs to a car; and
- (g) depreciation in respect of a car,
but does not include -
- (h) such an outgoing incurred, such expenditure incurred, or such a payment made, in respect of travel outside Australia; or
- (j) a taxi fare or similar expense;''
7. Under the terms of his contract, the applicant is provided with a medium-size four-cylinder sedan by his employer. The vehicle is maintained and fuelled at the employer's expense. I find on the facts that the employee was entitled to use that car for private purposes and that it was for the applicant's personal use. Both of these points were conceded by the applicant in cross-examination. But the company did not reimburse the applicant for tolls, parking expenses, cleaning costs and the like. In accordance with the Commercial Travellers' Award and its own experience of reasonable costs incurred by employees, the employer made a payment covering total expenses to employees. In the relevant period, the employer's Group Certificate for the applicant shows $3,250 for such expenses.
8. I find that the threshold requirements for the operation of the exclusion of deductibility in s 51AF(1) are satisfied. The employer provided the car to an employee. The employee was entitled to use the car for private purposes. The car was for the exclusive use of the employee. The expenses at issue, the toll charges and parking expenses, were incurred by the employee during the relevant period or attributable to the period. The issue is whether they are expenses ``in respect of a car expense that relates to the car''.
9. The applicant argued that this expense was not a ``car expense'' within the meaning of s 82KT(1). More specifically, he argued that it was not an expense ``incurred in connection with the operation of a car'' within the meaning of s 82KT(1)(a). He argued that this test should be read down and given a construction which required something more than temporal nexus and the mere connection between the car and expense. The expenditure, he argued, needed to be sufficiently proximate to the upkeep and running of the car. He developed an argument which relied on a distinction between expenses which had a direct connection to the operation of the car (such as petrol, oil and replacing worn tyres) and other expenses.
10. The respondent relied primarily on the literal meaning of the definition and argued that the tolls and parking expenses had a connection with the operation of the car and that the definition applied to expenses connected to the car in the broadest sense.
11. On the fact of it, the words ``in connection with'' develop a very broad and loose nexus between the car and the expenses. This definition of ``car expenses'' does a wide range of services in the Income Tax Assessment Act 1936 and Fringe Benefits Tax Assessment Act 1986. First, it refers to those expenses which must be substantiated. While one might have expected the legislature to cast their net wide in such a context, the legislature would always have the general substantiation provisions to rely on if any particular expenses fall outside the umbrella of the ``car expenses'' definition. Second, it is used to disallow deductions for employee-paid income-earning expenses which would otherwise pass the s 51 threshold. Third, it is then used in the Fringe Benefits Tax Assessment Act 1986 to govern exemptions from fringe benefits tax at the employer level for reimbursements of expenses by employers to employees.
12. As one might have expected, the authorities interpreting wide words like ``in connection with'' are not particularly instructive. What comes out loud and clear is that such wide formulas are context related and that courts have in the past insisted that they should be given that construction which would best accord with the policy of the provision
91 ATC 415
being constructed. In
Burswood Management Ltd & Ors v Attorney-General (Cth) & Anor (1990) 20 ALD 357 a Full Federal Court gave a wide definition to the formula in Schedule 2, paragraph (f) of the Administrative Decisions (Judicial Review) Act 1977 in deciding whether to give financial assistance ``in connection with the... conduct of proceedings in a civil court''. The Full Federal Court, Lockhart, Wilcox and Hill JJ, said in a joint judgment (at 359):
``The words `in connection with' are words of wide import; and the meaning to be attributed to them depends on their context and the purpose of the statute in which they appear. As Davies J said in
Hatfield v Health Insurance Commission (1987) 15 FLR 487 at 491: `Expressions such as `relating to', `in relation to', `in connection with' and `in respect of' are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute... The terms may have a very wide operation but they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear.'''
On the other hand, dicta in another recent Federal Court judgment by Hill J in
FC of T v Faywin Investments Pty Ltd 90 ATC 4361 at 4379 assumes ``in connection with'' will have a wide meaning. He says (at 4379):
``The word `in', followed by a participle, may lend itself to either a broad or more restrictive interpretation, depending upon the context in which it is employed. The broader interpretation construes the word `in' as meaning `in the course of' or `in connection with'. See
Pioneer Concrete (N.S.W.) Pty. Ltd. v. F.C. of T. 86 ATC 4435 at p. 4441;
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309. The narrower interpretation construes the word `in' as meaning `directly in'.''
13. Thus, in constructing the width of the causal words, we are thrown back to the purpose of the definition and the context of the provision in which it is used. The effect of s 51AF is to disallow an expenditure incurred to produce assessable income. The basis of this disallowance is that the expenditure is ``in connection with the operation of the car'' (in para (a)) or ``in connection with a car'' (in the general words at the start of the definition). Those general words, if anything, cast the net wider and, since the definition says car expenses means expenses incurred ``in connection with the car'', and later definitions are ``without limiting the generality'' of this definition, we can rely mainly on those words. Clearly it is dangerous to give a very wide literal meaning to this provision without critical analysis. The effect of this would be to exclude deductibility of any expenditure with the flimsiest connection to an employer-provided car. We need more than a plausible causal link. To take a fanciful example, if the employee had personally incurred a tortious liability in a motor accident in the course of earning his assessable income, these provisions could not sensibly extend to exclude deductibility.
14. The existence of the car in this case was the causa sine qua non of the expenditure. But for the car, it would not have been expended. But it is not the causa causans. The existence and operation of the car was not the moving cause. The dominant reason for the expenditure was the applicant's appointments in the city. Had he flown to another city or hired a taxi, or hired inner city office space, such expenditures would clearly have been deductible. He crossed the bridge and rented parking space because this was directly related to his doing business. Having regard to the context of the definition and its place in the Act is this a matter the legislature would have intended to cover? It is obvious that the drafter of this provision would want to use very wide language so that persons wishing to circumvent the spirit of this legislation could not escape its net by constructing suitably ingenious methods of paying car expenses. But the very width of the language in the provision puts an onus on decision-makers in general, and this Tribunal in particular, to make sure that the provision is constructed in such a way as to give effect to its policy objectives.
15. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1985 (at 46) provides some assistance. It makes it clear that s 51AF is drafted as part of a coherent scheme with the substantiation requirements and, in particular, s 82KT. It says that the denial of deductions is ``consistent with
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the exclusion from the substantiation requirements'' and that such deductions are denied on the view that such expenses have ``the true character of a reimbursement by the employee to the employer for the right to private use of the car''. This is ambiguous but it does give some basis for seeking the policy of s 51AF. Is the mischief double dipping? Is it feared that the employer, having paid tax on the car under a Fringe Benefits Tax Formula which gives implicit recognition to the employer's costs in running that car, that the employee should not be able to claim the same costs as deductions? Or is the evil similar to that in disallowing all deductions for business entertainment? Is it that the business and personal objectives of the expenditure are so intertwined and the opportunities for reliable supervision so limited that comparative tax justice between taxpayers is best approximated in all the circumstances by disallowing such deductions altogether? After all, this is an imperfect world. The costs of fine tuning and the difficulties in ensuring compliance may lead to the legitimate conclusion that an arbitrary solution is the least unjust option.
16. The representative for the applicant, Mr Gibbs, assisted the Tribunal with a well argued case. He attempted to demonstrate that the relevant provisions of the Income Tax Assessment Act 1936 and the Fringe Benefits Tax Assessment Act 1986 must be read as one symmetrical whole and developed a broad policy argument to reconcile. As I understand the argument, it goes as follows. Section 22 of the Fringe Benefits Tax Assessment Act 1986 makes the reimbursement of an expense to an employee, in circumstances relevant to the present case, exempt only if the reimbursement ``is calculated by reference to the distance travelled by the car'' (s 22(d)). Consistent with this policy, it excludes the deductions for such items claimed by the employee. The policy is that such a deduction of a ``car expense'' should only be allowed on a prorated mileage basis. The assumption behind this definition is that the expenses covered are only those which can fairly be reflected in a mileage apportionment, like tyres, oil and fuel. This would exclude expenses which do not have a direct connection to the operation of the car. If it is then noted that s 22 adopts the same, income tax, definition of ``car expense'' as that before us in this case, the basis for a coherent construction is provided. The only costs excluded by s 51AF are those which directly relate to the operation of the car like tyres, oil, petrol, car maintenance and excludes less proximate forms of expenses. If those expenses which the employer can reimburse are tax free, it follows that the same expenses should not be deducted by the employee. But, since no other expenses are exempt to the employer, no other expenses should be disallowed to [the] employee.
17. The applicant's reasoning then pointed to s 58G of the Fringe Benefits Tax Assessment Act 1986. This makes the employer provision of motor vehicle parking facilities exempt from Fringe Benefits Tax. This, he argued, establishes that the legislature understood such matters to be excluded under the definition of ``car expenses'' adopted in s 22. While he conceded that such an exemption might have been spelt out, out of an abundance of caution, the better view was that this indicated that only direct operational costs were contemplated in the definition of ``car expenses''.
18. The respondent did not rebut these arguments effectively. The main basis of the respondent's argument was that, since the language of s 51AF was plain, mobilizing the dicta of Mr Todd in Case U114,
87 ATC 682 at 710, this Tribunal should give a plain meaning to it. To that, the response must be, as I have demonstrated, that very wide language which draws minimalist causal connections must at some stage be disciplined by a coherent view of its purpose and limits. That stage is reached when, in clear contravention of Chief Justice Dixon's basic matching principles in
Carden's case (1938) 5 ATD 98 at 130; (1938) 63 CLR 108 at 152, a legitimate business expense is not given recognition in anyone's hands. Such a conclusion would require either explicit language, a clear policy evident on the face of the legislation, or reasonably to be inferred from it. While such a justification might be constructed or alternative constructs of the legislative purposes might be available, none was put forward in this Tribunal to rebut the case of the applicant. Accordingly, the Tribunal finds that these particular expenses are not covered by the prohibition on deductibility in s 51AF.
19. One such argument arises from the definition of ``car expense'' in s 82KT itself. After the wide definition, that ``car expense''
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means an expense incurred ``in connection with a car'' the legislation says that it includes a number of matters and primarily expenses ``in connection with the operation of a car''. This would tend to suggest that the wider definition in the general words of the definition covers matters going beyond operational expenses. The list of other matters confirms this. Expenditures arising from borrowing to buy the car is, for example, included. Contrast the much narrower definition of ``car expense'' in s 136 of the Fringe Benefits Tax Assessment Act 1986, which is used in the calculation of car fringe benefits under the cost method in s 10. This might indicate that the definition used, inter alia, to disallow employer deductions is much wider.
20. But my consideration of the policy of these provisions does, as advised after the argument in this case, lead me to the view that the disallowance of car expenses is primarily put in place to prevent ``double dipping'', in which an employee claims expenses already factored into the formulas used to calculate fringe benefits tax assessed to the employer. That being so, the better construction is that expenses such as parking fees and bridge tolls in the present case, linked to the car, but generated for reasons other than the direct operation of the car and not otherwise factored into the tax regime, should not be disallowed. Of course, deductions will not extend to any payment by the employee of parking expenses or any other expense to the employer which are subject to fringe benefits tax exemption in the employer's hands under s 22. But it must not be forgotten that these exemptions relate only to reimbursements calculated by reference to distance travelled.
21. Another argument which has some force is that, since s 22 of the Fringe Benefits Tax Assessment Act 1986 provides an exemption for employers who reimburse ``an expense payment provided to an employee... in respect of... employment'', there is no need to provide employees with the ability to deduct such expenses. It might be argued that employer monitoring of such expenses is a better administrative basis for managing the expenses regime than allowing employee deductions. The employer in this case obviously found it more advantageous to pay a general allowance and there is no evidence that a s 22 exemption was claimed. The balance of commercial convenience might be settled by negotiation and appropriate administrative or legislative action to widen the exemptions in s 22. The issue before this Tribunal, however, is whether this employee, having spend money on earning assessable income, should be allowed to deduct it and it would take cogent argument based on clear provisions to disallow bona fide business expenses.
22. It is agreed by the parties that parking fee expenses of $2,048 were properly substantiated. It was also agreed that the bridge toll expenses for the relevant year were not substantiated within the meaning of Subdivision F of Division 3 of Part III of the Income Tax Assessment Act 1936.
23. Accordingly, and for the reasons given, the decision of the respondent is set aside on the deductibility of the parking fee expenses of $2,048 but otherwise affirmed.