[8.1] The heading now adopted makes an assumption about the framework of s. 51 which has been explained in earlier paragraphs. None of the capital losses and outgoings exception, the private losses and outgoings exception and the domestic losses and outgoings exception is a true exception. An expense is capital if, though relevant, it is not a working expense. An expense is private or domestic if it is not a relevant expense. The assumption comes under some challenge from the High Court decisions in Forsyth (1981) 148 C.L.R. 203 and Handley (1981) 148 C.L.R. 182 but it is not definitively rejected, and, it will be seen the reasons for judgment in those cases highlight the difficulties of analysis which any contrary assumption involve. The challenge is to be found in the judgments of Mason, Wilson and Murphy JJ. It is not found in the dissenting judgments of Stephen and Aickin JJ., who were at some pains to discount the significance of any challenge that might be found in earlier cases.

[8.2] In [5.8] above the assertion was made that there is no case in which an expense has been found to be incurred in gaining assessable income, but has been denied deduction as a capital expense. It may also be asserted that there is no case in which an expense has been found to be incurred in gaining assessable income, but has been denied deduction as a private or domestic expense. Forsyth and Handley do not destroy the latter assertion, and this has a bearing on the observations made in the case on the significance of the capital and private and domestic exceptions. A view that the exceptions have a function of denying the deduction of outgoings that are otherwise deductible would be the more persuasive if it were supported by an illustration of their operation in that function.

[8.3] Mason J. in Handley said (at 194): “outgoings incurred in gaining or producing assessable income and outgoings of a capital or domestic nature are not mutually exclusive. Whether the same is true of outgoings of a private nature is a question that may be left to some future occasion.” One would have thought that domestic outgoings are but a class of private outgoings, and that Mason J. had to a degree already taken a view in the earlier part of his statement on the question he has left for a future occasion.

[8.4] In Forsyth, Wilson J. (at 216) referred to a comment by Menzies J. in Hatchett (1971) 125 C.L.R. 494 at 498 that “it must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive”. Wilson J. expressed his ready acceptance of that proposition, but expressed the opinion that it was not “necessarily true of outgoings of a domestic nature”. Unless it is to be claimed that there are some domestic expenses which are not private, the agreement with Menzies J. and the opinion expressed in regard to outgoings of a domestic nature cannot stand together. In the same passage in his judgment, he expressed the view that an outgoing may be incurred in gaining assessable income and yet be an outgoing of a capital nature, and drew support from Hatchett where Menzies J. said:

The quotation from Menzies J. is the nearest the law reports offer of an illustration of an exception operating to exclude. Perhaps Menzies J. did not intend it to be an illustration. It is, in any case, not an illustration that can be accepted. The purchase of plant is not a working expense of a baker’s business. None of “working”, “incidental”, “constant demand”, “operating” or “maintenance” would describe it.

[8.5] Murphy J. in Handley (1981) 148 C.L.R. 182 at 196 was content to assert that “the section contemplates that an outgoing incurred in gaining assessable income may not be an allowable deduction because it is of a domestic nature”, and to direct attention to circumstances which he thought yielded a conclusion that the outgoings in question were of a domestic nature.

[8.6] Stephen J. in Handley (at 192), after an observation that the exception of private or domestic outgoings had not been the subject of close examination by any court, inclined towards a view that the exception of private or domestic outgoings, like the exception of outgoings related to exempt income, could be explained in the words of Ronpibon Tin N.L. & Tongkah Compound N.L. (1949) 78 C.L.R. 47 at 56 as securing the “not unimportant purpose of making an express contrast”. Aickin J. took a more positive stand (at 200): “The express exclusion in the closing words of the subsection of expenditure of a private or domestic nature has the same character as the exclusion of expenditure in gaining exempt income; it must be regarded as having been inserted by way of precaution or emphasis…”

[8.7] An excluding function for the private or domestic exception would require the adoption of a view that expenses that are private or domestic are to be denied deduction, however relevant to the derivation of assessable income they may be. This would in turn require the defining of private or domestic expenses in terms that do not let in considerations of relevance to the derivation of income. Such a view may be possible, but it would make little sense. Eating, drinking, clothing oneself, sleeping and enjoying shelter would be prime candidates for categorising as matters that are absolutely private or domestic— absolutely in the sense that they are such whatever their relevance to income derivation. If they are so categorised it would follow that the cost of the business lunch, the cost to the actor of refreshments taken in actual performance of the Mad Hatter’s Tea Party (Templeman J. in Caillebotte v. Quinn [1975] 1 W.L.R. 731 at 733), the costs of meals and accommodation incurred by a commercial traveller while travelling on business, and the costs of protective clothing incurred by a taxpayer working in industry are not deductible.

[8.8] There is no doubt a need to protect the base of the income tax against a too-ready allowance of deductions which may reduce the base to a point where the income tax becomes a tax on income saved. An imaginative mind will find some relevance to income derivation in any expense. Eating sustains a taxpayer’s ability to work and derive income, and to this extent the expense of eating is always relevant to the derivation of income. The law must insist that there be a “sufficient” connection between an expense and income derivation, and sufficiency imports questions of degree which must always leave room for judgment. But it is preferable to live with the questions of degree, than to attempt via notions of matters that are absolutely private or domestic, or “essentially” private or domestic in the language of Forsyth and Handley, to maintain restraint in the allowance of deductions.

[8.9] It is proposed to deal with a number of areas where the private and domestic exceptions have been emphasised in reasons for decision. In the view of this Volume, all the decisions are concerned with fixing the point where connection with a process of income derivation is sufficient to make an outgoing relevant.

Food, Clothing, Health, Shelter and Child care Expenses

Expenses of food

[8.10] Some connection with a process of income derivation, at least with a process of deriving active income, can be claimed for all of food, clothing, health, shelter and child care expenses. At the lowest level it will be a connection of the kind that is involved in an assertion that one must live to work and one must eat to live. Clearly an income tax could not accept such a connection as a sufficient connection to make the expenses of food relevant. At the highest the connection may be of the kind that links one’s own lunch eaten in company with a client when business is transacted, with the carrying on of the business, or links expenses of tasting food incurred by a taxpayer who carries on a business of providing advice to consumers. One would expect there to be no argument about sufficiency of connection in these instances; though at intermediate levels decision will involve judgment, and may reflect a policy that the base of the income tax needs to be protected. It would be assumed that the self-employed is entitled to the cost of his meals while travelling on business, but not to the cost of his lunch if he is presently working at his base. It would be assumed that the employee commercial traveller may expect the same treatment, and that the cost of an employee’s evening meal does not become deductible because he has been asked to work overtime.

[8.11] It does not assist the rationalisation of these consequences to say that eating is absolutely or essentially private, and is excluded from deduction by the exception of private outgoings. If eating is essentially private, no deduction will be allowed of the cost of meals in any circumstances. If it is said that eating is essentially private unless there is a sufficient connection with a process of income derivation, the exception is without any function. It simply restates the requirement of relevance. An illustration of an expense of eating that is relevant and deductible, beyond the expenses of the tea consumed by the actor in the Mad Hatter’s Tea Party (Templeman J. in Caillebotte v. Quinn [1975] 1 W.L.R. 731 at 733) is afforded by Cunliffe (1983) 83 A.T.C. 4380. The taxpayer was in business as a restauranteur and ate meals in restaurants overseas in the course of studying techniques of preparing, presenting and serving meals in those restaurants. Expenses of some meals were held deductible, notwithstanding that there must have been a purpose to satisfy a need for food as well as the purpose of gaining knowledge. Presumably the study purpose was seen as dominant. An apportionment so as to disallow a part of the expense would not have been appropriate. On the view taken in this Volume ([9.1]ff. below), an apportionment would only have been appropriate if distinct payments might have been made in respect of the nourishment and enjoyment afforded by the food, and a distinct payment for the experience of testing its quality. Clearly distinct payments could not have been made. Which is not to say, in relation to some meals, study could not be found to be subordinate to nourishment and enjoyment. The court in Cunliffe concluded that the expenses of some of the meals should be denied deduction. Judgments of this kind about the facts are, no doubt, banal, but they are unavoidable in the application of the relevance principle.

[8.12] In White (1975) 75 A.T.C. 4018 the taxpayer incurred expenses in relation to a course of study. The case is considered again in [8.43]-[8.46] below. The taxpayer was allowed a deduction by a Board of Review of the travel expenses involved in attending the school, but denied a deduction of the cost of meals he had to buy away from home because of the need to travel to the school. He did not appeal against the denial of the meal costs, though the Commissioner successfully appealed against the allowance of the travel costs. The cost of meals taken during working hours at one’s normal place of work will generally be non-deductible. An appropriate test would insist that the costs of meals cannot be relevant if the taxpayer might have been expected to sustain himself on food brought from home. There will none the less be marginal cases, such as the cost of a meal when a taxpayer works overtime. The meal expenses in White are another marginal case.

Expenses of clothing

[8.13] Some attempt has been made, in relation to clothing, to set a test of sufficient connection in phrases such as “necessary and peculiar”, which will allow a deduction of the costs of protective clothing worn while engaged in a process of income derivation, and of the costs of the uniform worn by a barrister or judge, unless the costs are to be regarded as not working, in which event depreciation may be allowed. At intermediate levels are the costs of clothing which is not necessary and peculiar but is worn by the taxpayer only while engaged in a process of income derivation—the sombre suit or dress worn by a barrister beneath the uniform (Mallalieu v. Drummond (1981) 1 W.L.R. 908). The clothing expenses of a “plain-clothed” detective might however be thought to be at a level which could not attract deductions (cf. Hillyer v. Leeke (1976) 51 T.C. 90).

[8.14] It would be possible to treat differently the cost of cleaning clothing, and the cost of the clothing itself. Where the need for cleaning of clothing that is not necessary and peculiar is the more frequent because of the conditions experienced in the process of income derivation, the costs of cleaning could be treated as relevant. The element of connection is, however, tenuous (cf. Ward v. Dunn (1978) 52 T.C. 517).

Health costs

[8.15] There is no Australian judicial decision on the deductibility of health costs. Prior to 1975 health costs might have attracted concessional deductions and, save where the taxpayer sought to establish a loss available for carry forward, there was no call to assert a s. 51 deduction. Health costs may now be included in the concessional rebate expenditure that can give rise to a rebate of tax. But there is clearly a greater advantage to the taxpayer if health costs are deductible under s. 51(1).

[8.16] The relevance of United Kingdom decisions on the deductibility of health costs to the question of deductibility under s. 51(1) is limited by provisions (s. 130(a) and (b) of the Income and Corporation Taxes Act 1970) of the United Kingdom legislation which require that an outgoing to be deductible must be “wholly and exclusively laid out for purposes of the trade, profession or vocation”, and which deny a deduction for expenditure “for maintenance of” the taxpayer “or for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation”. Those provisions are relied on in Norman v. Golder [1944] 1 All E.R. 632 and Prince v. Mapp [1970] 1 W.L.R. 260 for a view that where there are two purposes in incurring health costs—“the advantage and benefit of the taxpayer as a living human being” and the advantage of the trade profession or vocation—a deduction must be denied. Australian law does not include provisions of the kind included in the United Kingdom legislation. Expenses that have two purposes may be apportioned in Australia between those purposes, and a deduction allowed of that amount that relates to the purpose which attracts deductibility. Which is not to say that Australian law would treat the two purposes situation involved in Norman v. Golder as one that could involve apportionment. The primary question is always whether the expense is relevant. The outgoing in Magna Alloys & Research Pty Ltd (1980) 80 A.T.C. 4542 would not have been the subject of an apportionment if it had been concluded that the payments were made for mixed purposes of securing the company’s interest and of conferring a gratuitous benefit on the directors. An apportionment would only have been proper in these circumstances if a distinct outgoing might have been incurred in serving the company’s interest and another in conferring the benefit. The existence of two purposes, only one of which favours a conclusion that an expense is relevant, does not preclude a conclusion that the expense is relevant. But there is no room to express a doubt about the sufficiency of connection between an expense and income derivation, and thus its relevance, by allowing a deduction of only part of the expense.

[8.17] A view that health costs are private in essential character and are denied deduction by the private outgoing exception in s. 51(1) might be asserted. In this, as in other contexts, however, an analysis which would assign an excluding function to the exception is unacceptable. If costs of protective clothing are not excluded by the private outgoing exception, the costs of protective medicine, if they are specific to the hazard against which protection is sought— perhaps a protective cream applied to the skin—should not be excluded. And if the cost of protective medicine is not excluded, the cost of treatment of some condition caused by working should not necessarily be excluded. What view should be taken of the cost of treatment of ill-health caused by engaging in a process of income derivation depends on the degree of connection with income derivation that is required in this context. There is much to be said for holding that a degree of connection which depends on the ill-health having been caused by engaging in a process of income derivation is insufficient. To adopt a notion of cause by the activity of income derivation is to let in problems of cause which will make for an unacceptable complexity in the administration of the law. In Norman v. Golder the taxpayer claimed that his ill-health had resulted from unfavourable working conditions. The Court of Appeal escaped the need to decide whether this justified deduction of the medical expenses by pointing to a duality of purpose, and to the provisions of the United Kingdom legislation to which reference has already been made.

[8.18] There is some suggestion in the judgment of Pennycuick J. in Prince v. Mapp [1970] 1 W.L.R. 260 that medical expenses incurred in the restoration of a specific bodily function that is necessary for the process of income derivation in which the taxpayer is engaged could attract deductibility. If it had appeared that the only purpose of the taxpayer in having the finger tendon repaired had been to enable him to play the guitar professionally, Pennycuick J. would have allowed a deduction of the expense of the surgery involved. A test of sufficient connection for purposes of s. 51 which would allow the deduction of medical expenses in these circumstances may be thought unacceptable. In the circumstances of Prince v. Mapp the expense may be thought specific, and the expenses of treating influenza not to be. But what view should be taken of the cost of spectacles for a person with defective sight? The latter question ranges into areas beyond the medical, though areas where the issues of relevance have their parallels. What view should be taken of the cost of an attendant without whom a paraplegic could not travel on business? In Gilbert (1982) 82 A.T.C. 141 a quadraplegic was denied a deduction in these circumstances. What view should be taken of the cost of keep fit classes undertaken by an airline pilot?

[8.19] If relevance is accepted, a question of working character of the outgoing will in some cases remain. It is arguable that an expense is not a maintenance expense if a correction of a substantial disability is involved: it is an expense of acquiring structure—capacity to engage in a process of income derivation. A line of argument of this kind, advanced in relation to self-education expenses, was however rejected in Finn (1961) 106 C.L.R. 60; in Hatchett (1971) 125 C.L.R. 494; and in White (1975) 75 A.T.C. 4018.

[8.20] “Medical expenses”, as defined, may generate a rebate of tax under ss 159N and 159P. If a medical expense is deductible under s. 51(1), there is a question of how the concessional rebate provisions are to be correlated with s. 51(1). There is no provision which expressly precludes the allowance of a concessional rebate expenditure and the deduction of that same expenditure under s. 51(1). Section 159M only applies to double rebates. Section 82 applies only to double deductions. It will be seen, however, that s. 82A deals expressly with the correlation of concessional rebate expenditure and s. 51(1) deduction where the expenditure qualifies as “self-education” expenditure.

Expenses of shelter

[8.21] The majority judgments in Forsyth (1981) 148 C.L.R. 203 and Handley (1981) 148 C.L.R. 182 came close to asserting that the expenses of shelter are excluded from deductibility by the domestic exception in s. 51(1). It is true that the cases concerned shelter in accommodation that was, architecturally, a part of the taxpayer’s home, and the majority judges were in any case persuaded that the expenses were not sufficiently connected with the taxpayer’s income earning activity to be relevant.

[8.22] A view that shelter for the taxpayer’s person is essentially private or domestic and excluded by the exceptions, is obviously unacceptable. It would require denial of the deduction of the expenses of commercial office accommodation. Where the view is put in a more limited form, so as to confine the notion of essentially private or domestic shelter to that which is insufficiently connected with a process of income derivation, the question of deductibility is returned to the domain of relevance where it belongs.

[8.23] Tests of relevance in regard to costs of shelter used as a study are examined below. These tests of relevance are inevitably concerned with the use that is made of the shelter, in effect the activities of the taxpayer while sheltered. Where relevance cannot be established by the use made of the shelter, a test of sufficient connection that will give relevance is not easily found. Some reference was made above to the question of relevance that arises in regard to the expenses of meals eaten by a taxpayer who is required to travel in the course of his business or employment. Deductibility of the cost of accommodation will follow the cost of meals. Deductibility of the costs of meals and accommodation while travelling in the course of one’s business or employment away from home, must rest on a view that the expenses are the consequence of being required by the demands of the income-earning activity to be away from home. Such a view assumes that the taxpayer has a home. The circumstances of a taxpayer who does not maintain a home while travelling on some extended assignment in connection with his business or employment does not fit easily with that view.

[8.24] A taxpayer may have a home which is close to one place of work. At the same time he has another place of work so far removed from his home and the first place of work that he must have accommodation while he works there. Those costs are presumably relevant and deductible, at least when the second place of work is within the same business or employment as the first. If it is a place of work within a distinct business or employment there is some room to argue that the costs of accommodation are a consequence of his having his home too remote from the second place of work. That argument can be made more strongly if he has only one place of work, albeit work that engages his attention for what may be only a short period in any year of income and, indeed, is for one period only: Charlton (1984) 84 A.T.C. 4415. And there is always a possible argument that he has established another, albeit a temporary home, in the accommodation he occupies while working at the second place, and the costs of accommodation at home are not deductible. That argument may not be available as long as he can be said to maintain the original home.

Child minding expenses

[8.25] A taxpayer may have no reasonable alternative to employing a babysitter for his child or paying to have his child minded while he is engaged in an activity directed to earning income. It may be said that the costs involved are an “essential prerequisite to the derivation of that income” from that activity (Mason J. in Lodge (1972) 128 C.L.R. 171 at 175). Yet the degree of connection with the derivation of income is no closer than that between the costs of eating and being able to work. Nor is it closer than the connection between the costs of employing another to look after an elderly relative who is in the taxpayer’s care, and the income-earning activity which the taxpayer is released to carry on. Nor is it closer than the connection between the costs of employing labour to do the domestic chores and income-earning activity; the taxpayer will assert that because of that income-earning activity he has no time to do the chores himself.

[8.26] In Lodge, Mason J. denied a deduction of child care expenses, emphasising the word “in” as it appears in s. 51(1) and referring to a like emphasis given by Megarry J. to the same word in a provision of the United Kingdom Income Tax Act 1952 (Sch. 9, para. 7). Megarry J. denied a deduction of child care expenses in Halstead v. Condon (1970) 46 T.C. 289. The United Kingdom provision related to an employee taxpayer and required that the expense should be “in the performance” of the employment. The taxpayer who was a widower, had employed a child minder to look after his two children while he went to work. Megarry J. said: “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…” (at 293). The emphasis on the word “in” foreshadows the analysis that Mason J. adopted in Lodge (1972) 128 C.L.R. 171 that child care expenses, because of their “essential character”, are not incurred in gaining income—an analysis in turn suggested by the judgments of the High Court in Lunney (1958) 100 C.L.R. 478.

[8.27] In Lodge (1972) 128 C.L.R. 171, Mason J. decided against a taxpayer on the ground that the expense was not incurred in gaining income. The “essential character” analysis in this context is not concerned with any distinct operation of the exception of private or domestic expenditure. At the end of his judgment Mason J. said: “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 s. 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 was of a private or domestic nature and for that reason is excluded by s. 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 s. 51(1)…” (at 176). These observations accord with the view of the framework of s. 51(1) adopted in this Volume: a finding that an expense is private or domestic is no more than a way of stating a conclusion that an expense is not incurred in gaining income because it is not sufficiently connected and thus is not relevant. It will be seen that in Forsyth (1981) 148 C.L.R. 203 and Handley (1981) 148 C.L.R. 182 there are times when the phrase “essential character” in the judgments of Mason and Wilson JJ. shifts in function, so that it appears not simply to be an identification of some expenses which are not incurred in gaining, but an identification of expenses which, if they are incurred in gaining, are denied deduction because of the operation of the private or domestic exception. A deduction of child care expenses was denied by the Federal Court in Martin (1984) 84 A.T.C. 4513 on the ground of want of relevance, and on the authority of Lodge.

Home Study Expenses

[8.28] No area is more productive of debate about relevance than home study expenses. The differences of view in the judgments in Forsyth (1981) 148 C.L.R. 203 and Handley (1981) 148 C.L.R. 182 are not differences of the kind that one must expect where a decision has to be made in regard to an expense at the margin of relevance to the derivation of income. They are more fundamental. Stephen and Aickin JJ., the dissenting judges, were persuaded that in each case it was clear that the expenses were incurred in gaining income —that they were relevant—and, if the exception of private or domestic expenses has any operation, the expenses were not private or domestic. Mason, Murphy and Wilson JJ., the majority judges, were, on the other hand, equally persuaded in each case that the expenses were not relevant because their essential character was private or domestic and, in any event, if the exception of private or domestic expenses has any operation, they were denied deduction because their essential character was private or domestic. In the latter respect, the essential character notion shifts in function.

[8.29] The references in the majority judgments to Lunney (1958) 100 C.L.R. 478 as support for an essential character analysis take Lunney further than the High Court intended in that case. In Lunney the “essential character” analysis is used to determine the relevance of an expense, and it may have support in the language of s. 51(1) in its use of the word “in”. But Lunney is not authority that an expense that is relevant may be denied deduction because its essential character is private or domestic.

[8.30] The use of the “essential character” analysis by the majority judges in Forsyth and Handley on the question of relevance may be thought to be, in any event, inappropriate. Home study expenses are distinguishable from expenses of travel to work, or food or child care expenses. A definitive characterisation by relying on the word “in” in s. 51(1) is not open. If they are otherwise relevant interest, rent, rates and taxes and insurance premiums relating to a home study are as much incurred “in” gaining income as are the same expenses relating to factory premises.

[8.31] One can accept the “essential character” analysis in the context of home study expenses only if it is a way of expressing a policy conclusion that expenses of this kind should not be deductible because the operation of any test that would allow deduction is likely to be administratively unacceptable.

[8.32] Any search for an analysis of the deductibility of home study expenses must begin with the authorities that would determine the deductibility of interest on money borrowed and invested in property, and of rates, insurance, repairs and other overheads, by reference to the use that is made by the taxpayer of the property: those authorities include the Federal Court decision in Ure (1981) 81 A.T.C. 4100 and the High Court decision in Munro (1926) 38 C.L.R. 153. In Faichney (1972) 129 C.L.R. 38 the analysis adopted by Mason J. offered the prospect of a satisfactory determinateness, and a limitation on deductibility, by insisting that the use of the property must be a non-domestic use if the overheads are to be deductible. It is not enough that the taxpayer works at home because working at home may yet be a domestic use. Every taxpayer works at home, even if it is only to worry to a degree about problems of work. Most will do more than that, but any test in terms of degree to which his thinking, writing, typing and filing are directed to issues of his work is administratively impossible to apply, even if the test adds a requirement that one may have regard only to the thinking, writing, typing and filing that is done in a distinct place, presumably not his bed, and that he does nothing else in that distinct place. Working at home will not be a domestic use when the adaptation of the accommodation in which he works and aspects of the work he does, or the contact with others that he makes there, demonstrate objectively that the use is not domestic. The circumstances would need to demonstrate that the accommodation in which the taxpayer works has been converted to business premises. That conversion will be evident where rooms in a home are used as a doctor’s surgery and waiting room, or as a studio by an artist engaged in a business of painting, or as a workshop by a person engaged in a trade. The conversion will be evident where a person engaged in a profession or trade regularly receives and confers with, or supplies goods to, clients and customers. There will of course be problems of apportionment, more especially where the activity that gives the home a character as business premises is not all conducted in a distinct part of the home, but they are not the only problems of apportionment that are posed by s. 51(1).

[8.33] Any attempt to characterise the expenses of the home study without reference to use must attract the criticisms offered by Stephen J. in Handley, and there is no escape from them. There is no reply to the criticism that the operation of s. 51(1) should not depend on the “vagaries of architecture” ((1981) 148 C.L.R. 182 at 188). Architecture is significant only to the extent that the objective inference of use of the home study as business premises may be assisted by it. The fact that a room is physically separate from other rooms which are used only for domestic purposes will assist an objective inference that the use of that room was for the purpose of income derivation, though it will not in itself be enough. But the fact that the room is physically part of a home, should not preclude deductibility if an objective inference of use as business premises can be drawn.

[8.34] Conceivably a barrister who rents a flat convenient to his chambers but does not sleep there, using the flat only as a study, may be entitled to deductions. This, one would think, is the marginal case—not that in Forsyth or Handley. The objective inference of use as business premises arising from the physical separation of the flat from his home is not compelling, and stands to be overcome by any use which is unequivocally domestic.

[8.35] An inference of use as business premises should not be drawn from the occasional contact with others in business affairs that a taxpayer may make in his home. One might doubt that there was enough to justify a conclusion that the premises were business premises in Swinford (1984) 84 A.T.C. 4803. The case is, however, most helpful in offering a distinction between a home that is “business premises”, a phrase adopted in the formulation of principle above, and a home used for “business purposes”. The first phrase will describe a situation where overheads may be deductible. The second may describe a situation where costs of travel between home and another place of work are deductible. They will be deductible if the use for business purposes will make the home a place of business. The notion of place of business and its significance will appear from the further reference to Swinford in [8.70] below.

[8.36] In Handley the Commissioner had allowed a deduction of an amount in respect of heating and cleaning of the home study, relying presumably on the decision in Faichney (1972) 129 C.L.R. 38 in which Mason J. allowed an amount in respect of lighting and heating. Handley affirms Faichney on the matter of deductibility of interest, rent, rates and insurance relating to a home study, but not on the matter of deductibility of heating and cleaning. The latter were not the subject of an appeal. There are however observations by Mason and Murphy JJ. in Handley which suggest that they might have held the heating and cleaning costs were not deductible. The reasons for allowing the lighting and heating costs in Faichney, while denying what might be called the overheads are less than compelling. In Handley Mason J. was content to explain his earlier decision by saying:

If one takes an approach in terms of use as business premises to the question of deductibility of overheads, the same approach should be taken to the deductibility of lighting, heating and cleaning.

[8.37] The intention of preceding paragraphs is to adopt the view that an approach in terms of use as business premises should be taken to the question of deductibility of overheads. To this extent the view of this Volume agrees with the dissenting judges in Forsyth and Handley. But the view disagrees with the conclusions of the dissenting judges. There was no basis in either Forsyth or Handley for an objective inference of use as business premises.

Self-Education Expenses

[8.38] The judgments in the Full High Court in Finn (1961) 106 C.L.R. 60 gave rise to a number of expectations about the deductibility of expenses incurred by a taxpayer for his own education:

(i) One of these was that there should be no discrimination in principle between an employed taxpayer and a self-employed taxpayer. In Finn, Dixon C.J. said (at 64):

The observations were made in relation to persons engaged in the exercise of a skilled profession, but the case was concerned with such a person and the judgment does not indicate any readiness to contemplate discrimination between the employed and the self-employed in contexts other than the exercise of a skilled profession. Observations to the same effect by Windeyer J. in the same case are not limited to a taxpayer in a skilled profession. Windeyer J. said (at 70):

Relevance—sufficiency of connection—is the same concept whether it be applied to an employee or to a self-employed person. There may of course be differences in result from the application of the same concept, because the income to which the expense must be relevant is the taxpayer’s income. In the case of an employee the expense must be relevant to his salary income, not the business income of his employer, though relevance to the latter must suggest relevance to the former. Where an employer meets directly the education expenses of an employee the discourse moves beyond the field of self-education expenses, though the concept of relevance remains constant. Some comment on deductibility by the employer and possible income quality of a benefit to the employee where education expenses of an employee are met by his employer, are the subject of comment in [8.53]ff. below.

[8.39] (ii) Another expectation was that a self-education expense that is relevant, whether it be an expense of an employed or of a self-employed person, will always be a working expense. An expense of acquiring education for oneself might be described as an expense of acquiring “human capital”. However significant is the increase in knowledge or skill that results, it will not, it seems, be held to be a non-working expense. Dixon C.J. observed in Finn (at 69):

The observation would cover an expense in improving his own knowledge incurred by an employed or self-employed person.

[8.40] (iii) A third expectation arising from Finn was that an expense of self-education may be deductible by an employed person, notwithstanding that the taxpayer is not required by the terms of his employment to incur the expense, and notwithstanding that his incurring of the expense does not generate a likelihood of an increase in his income by way of higher pay. It is true that Dixon C.J. in Finn gave significance to the fact that the education obtained by the taxpayer might “in respect of promotion to a higher grade,…prove decisive”, and to the fact that the taxpayer “was complying with the desires, and so far as going to South America was concerned, with the actual request of [his employer]” (at 67–8). It may be noted, however, that the taxpayer was not required by his employer to undertake the architectural studies, and that neither of the facts referred to by Dixon C.J. was stated to be essential. They were simply some of a number of elements which “considered in conjunction…[formed] a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income” (at 68). Other facts were the taxpayer’s motive to secure an advancement in grade and salary, and the view of his employer that the architectural studies were “a matter of distinct advantage to the [taxpayer’s] work for the State” (at 67).

[8.41] The second expectation arising from Finn—that a self-education expense will not be held to be a non-working or capital expense—has been maintained in the later single judge decision of Menzies J. in the High Court in Hatchett (1971) 125 C.L.R. 494 and the Supreme Court decisions in White (1975) 75 A.T.C. 4018 and Smith (1978) 78 A.T.C. 4157. But the first expectation—that there should be no discrimination—does not seem to have been sustained. It has come close to being abandoned in the abandonment of the third expectation. Tests have been developed such that an employed taxpayer is not entitled to a deduction for self-education expenses unless he is required by the terms of his employment to undertake the education, or there is a near-certainty that the successful completion of the programme of education will bring him a promotion and higher pay. These tests have been drawn from the decision of Menzies J. in Hatchett, though the tests have lost some of their authority as a result of the decision in Wilkinson (1983) 83 A.T.C. 4295 which suggests, in regard to the second test, that the “near certainty” of promotion and higher pay is too stern a test and something less may be enough to justify deduction. And the first test has lost some of its authority as a result of the refusal by the Federal Court in Martin (1984) 84 A.T.C. 4513 to accept that the first test will dictate a conclusion of relevance if an employee is required to incur expenses by his contract of employment. There are no similar limitations on deductibility applicable to a self-employed person. Relevance of self-education expenses in the case of a self-employed person will depend on a sufficient connection established by showing a purpose to maintain and advance his capacity to earn income, presumably in a business he presently carries on.

[8.42] There are, no doubt, good reasons in policy why the relevance of self-education expenses should not be too readily accepted. Self-education may involve travel, which for many is a form of recreation. A too-ready acceptance of the relevance of self-education expenses opens a prospect of deductions being allowed which will operate to subsidise recreational expenditure. But the Revenue can be protected by insisting that the circumstances must yield a clear objective inference that the purpose of the expenditure was to maintain and further income earning capacity in relation to some current income-earning activity.

[8.43] The specific tests of relevance in relation to an employee which have been developed out of the judgment of Menzies J. in Hatchett (1971) 125 C.L.R. 494, purporting to apply Finn (1961) 106 C.L.R. 60, are that the taxpayer must have been required by the terms of his employment to incur the expenditure, or must be able to show a near certainty of promotion if he is successful in the programme of education. The tests involve a discrimination against the employee. He may be denied deduction notwithstanding that there is a clear objective inference to be drawn from the circumstances that the purpose of the expenditure was to maintain and further his capacity to earn income in his employment. In White, the judgment of Menzies J. in Hatchett was applied by Helsham J. to deny a deduction notwithstanding that such an objective inference was clearly to be drawn. The only mitigation of the rigor of the judgment of Menzies J. was a concession by Helsham J. that the taxpayer’s failure or prospect of failure in the course of education he has undertaken will not necessarily require a denial of deduction. In Smith (1978) 78 A.T.C. 4157 and Lacelles-Smith (1978) 78 A.T.C. 4162 Waddell J. applied the judgment of Menzies J. in Hatchett with rather less concern for the second of the tests of relevance.

[8.44] There is some suggestion in the judgment of Menzies J. in Hatchett that a discrimination in principle between the self-employed and the employed taxpayer is required by s. 51(1). The suggestion is that the employee cannot call on the second limb of s. 51(1), because that limb is confined to a taxpayer who carries on a business. Menzies J. threw doubt on the statement of principle by Windeyer J. in Finn quoted in [8.38] above by drawing attention to the fact that the language used by Windeyer J. was the language of the second limb. The point has already been made ([5.30]-[5.33] above) that there is little, if anything, in the authorities to indicate that the second limb has a concept of relevance which differs from the first limb. In any event, there is nothing in the authorities apart from the judgment of Menzies J. that acknowledges a difference in principle that would warrant the tests of relevance that Menzies J. has applied to an employee.

[8.45] A test of relevance that would require the taxpayer to establish that it was a term of his contract of employment that he would pursue the education is not expressly adopted by Menzies J. in Hatchett. Attributing such a test to him is rather a matter of inference from his insistence that the employer’s action to encourage the taxpayer to pursue the education was not enough. In fact in Hatchett the employer had made a contribution towards the fees the taxpayer had paid. A test that insists on a term of the contract of employment has been reasserted by Boards of Review relying on Hatchett, and relying on the interpretation of Hatchett in the judgment of Helsham J. in White (1975) 75 A.T.C. 4018. Helsham J. said (at 4022): “As the result of the decision in [Finn and Hatchett]…expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under s. 51 when it can be said that those studies are part and parcel of the employment, which means that the expenditure is incurred in the process of carrying out the employee’s duties, or, even if they are not such, they can be seen to have a direct effect on income.” The test is expressed in the Boards of Review as requiring that pursuing the education must be a “condition” of the taxpayers’ employment. The word “condition” appears in the judgment of Menzies J. in Hatchett (1971) 125 C.L.R. 494 at 498 but in a reference to the source of the taxpayer’s expectation of promotion, and thus in relation to the second test. The “condition of employment” test as adopted by the Boards of Review is a test in terms of contractual obligation, though the word condition is presumably not intended to have its technical meaning of a fundamental term of the contract. And the word does not have the meaning of circumstances of employment which it has in the phrase conditions of employment as it is used in [4.43]–[4.44] above in distinguishing an advantage which is inherent in the circumstances of an employment, and an advantage which is a benefit from an employment.

[8.46] A test of relevance which makes the terms of the contract of employment critical may be narrower or broader in its operation than a principle which simply leaves relevance to be determined by an objective inference as to the purpose of the taxpayer in pursuing the education. It will be narrower in its operation, as it was in White (1975) 75 A.T.C. 4018, where the employer has done no more than encourage the employee to pursue the education, though the education has such direct significance in maintaining or increasing the taxpayer’s competence to perform his work as an employee that an objective inference of a purpose of maintaining or increasing that competence must be drawn. It will be wider where the taxpayer is required to pursue the education by a term that may have been included in his contract at his request, though the education has only a remote significance in increasing or maintaining competence.

[8.47] A test of relevance which requires an employee taxpayer to show a near-certainty of promotion and thus higher pay, comes near to adopting a “blast from the whistle” approach to relevance ([5.34] above), an approach rejected by the High Court in Charles Moore & Co. (W.A.) Pty Ltd (1956) 95 C.L.R. 344 and W. Nevill & Co. Ltd (1937) 56 C.L.R. 290. And it is a test that cannot be available to a taxpayer who has reached a level of employment from which no promotion is possible. He may be a managing-director, a senior academic or a judge. Such a taxpayer will be restricted to the test in terms of contractual obligation, and he may need to rely on the indulgence of the Commissioner in agreeing that it is an implied term of his employment that he will pursue education, notwithstanding that he enjoys a wide freedom of action in this matter.

[8.48] It may that where the taxpayer is engaged in a “skilled profession” as he was in Finn (1961) 106 C.L.R. 60, the authority of Finn, without the interpretation in Hatchett, can be claimed. The judgments in Finn do not insist that the taxpayer, who was not under any contractual obligation, would have been denied deduction had it not been for the prospect of promotion. In drawing attention to facts in Finn all judges were concerned with their significance as facts from which an inference of purpose to maintain and advance capacity could be drawn. There was no intention to select facts as being essential to deductibility. A distinct law for taxpayers in skilled professions is not warranted. Discrimination in favour of the employee who is in a skilled profession is as unacceptable as discrimination in favour of the self-employed.

[8.49] A return to basic principles of deductibility expressed in relation to an employee in Finn, should not open the floodgates which the Commissioner, judges and board members may fear. The undertaking of education directed to a general improvement in knowledge does not justify an objective inference of purpose to maintain and increase competence in an employment, whatever the nature of that employment. And education directed to the gaining of knowledge in a specific discipline other than that in which an employee is involved in his current employment does not yield any objective inference. The expense of gaining knowledge in a specific discipline may be connected with an activity in earning income which the taxpayer has planned to enter, but it is unlikely to be judged sufficiently connected. In any event, it will be denied deduction because of the contemporaneity principle if that principle is maintained. Where education is sought by observation in the field and discussions with persons who work within the same discipline as the taxpayer, a taxpayer whose employment requires him to expand knowledge, not just his own knowledge, may be better placed. There will always be marginal situations where a decision cannot be manifestly correct. But a decision that rests on the application of principle, rather than on tests that may operate in defiance of principle, even though the decision on the basis of the latter may be the more predictable, is to be preferred.

[8.50] The contemporaneity principle seems to have been ignored by Lee J. in Highfield (1982) 82 A.T.C. 4463. The taxpayer who incurred expenses in respect of advanced dental studies overseas had leased his dental practice to another. At the same time Lee J. raised the possibility that expenses of advanced studies that may qualify the taxpayer for entry into a specialist practice may be seen as non-working. The expectation arising from Finn that a relevant expense will always be seen as working may, to this extent, be qualified. Finn would reject any view that expenses of self-education are capital as expenses of acquiring “human capital”. But the case does not preclude an argument that an expense that may be seen as incurred for the purpose of obtaining a right to engage in an arm of professional activity presently denied to the taxpayer, is a non-working expense.

[8.51] Generally, an expense of self-education will be deductible as to the whole of it, or not at all. In this, as in other contexts, doubts about relevance are not to be expressed by allowing a deduction of only part of the outgoing ([9.11] below). Clearly a conference fee, so far as it relates to attendance at conference sessions and to the obtaining of conference papers, must be deductible as to the whole of it or not at all. Deductibility of accommodation and food expenses while attending the conference will follow the deductibility of the conference fee. Deductibility of expenses for fares in attending the conference will follow the conference fee if the expenses for fares have no other function than enabling the taxpayer to attend. If attendance at the conference is preceded or followed by a substantial holiday in the area where the conference is held, or at some stopover en route to that area, deductibility of fares, otherwise accepted as relevant, may become doubtful. The existence of purposes of the expense other than self-education may justify a conclusion that there is insufficient connection of the expense with income derivation to make it relevant. An apportionment is not appropriate. There may be a deduction of such part of the fares expense as relates to the cost of travel beyond the stopover. But where a holiday is taken in the area of the conference a deduction of part of the fares could be seen as an attempt to express a doubt about relevance through an apportionment. The approach to apportionment of an expense suggested in [9.11] below is that it is proper only when a separate outgoing could have been made to serve the purpose that would give the expense relevance.

[8.52] Section 159U provides for inclusion of the “expenses of self-education” in concessional rebate expenditure that may attract a rebate of tax under s. 159N. The amount that may thus be treated as a rebatable amount is limited by s. 159U(3) to $250. The definition in s. 159U(5) of “expenses of self-education” limits those expenses so that they must relate to “a course of education provided by a school, college, university or other place of education and undertaken by the taxpayer for the purpose of gaining qualification for use in the carrying on of a profession, business or trade or in the course of employment”. It will be apparent that the expenses so defined will cover some expenses that would not be deductible under s. 51(1). To this extent s. 159U expands tax relief. But clearly the definition could cover expenses that would be deductible under s. 51(1). Overlap and possible relief by deduction as well as by rebate is however precluded by provisions in the definition and in s. 82A. Expenses that would be deductible under s. 51(1) that are otherwise within the definition of expenses of self-education are, to the extent of the first $250, denied deduction under s. 51(1), and must be dealt with as rebatable amounts. Whether they will thus generate any actual rebate of tax depends on there being a total of rebatable amounts exceeding $2,000 (s. 159N).

[8.53] An employer may meet directly the costs of education undertaken by an employee. The employer may, for example, pay directly the fares and conference fees of an employee attending an overseas conference. The costs will be deductible by the employer, whether his purpose in meeting them was to secure an increase in the competence of his employee or to confer a benefit on the employee by way of a reward for his services. If the employer’s purpose is to bring about an increase in the competence of the employee, it is arguable that any benefit to the employee is one inherent in the conditions of his employment—a concept examined in [4.43]–[4.44] above and it is not a benefit which is income under s. 26(e). An analysis which may be indistinguishable from the condition of employment analysis would be that the payment by the employer is not income of the employee as it is a contribution to capital within Proposition 7. Hochstrasser v. Mayes [1960] A.C. 376 is relevant. In these circumstances there may be an advantage in the direct payment by the employer. If the employee incurs the expense himself, he may be denied a deduction, even though he has incurred the expense in the interest of the employer. There is no necessary correlation between the operation of the condition of employment or contribution to capital principle and the deductibility of the expense if incurred by the employee. It was suggested in [4.56] above that the provision by the employer of residential accommodation to an employee called on to live in a remote place may not be a benefit to the employee that is his income. It is a contribution to capital. Yet the employee may be denied deduction of the expense of that accommodation if he incurs it himself.

[8.54] Where the employer’s purpose is to confer a benefit on the employee by way of a reward for his services, there is a prospect that the benefit is not a condition of employment or a contribution to capital, but is an item of income of the employee under s. 26(e). There will be no expense incurred by the employee that could generate an off-setting deduction available to the employee. There will of course be no unfairness if an expense incurred by the employee for the education would not have been deductible in any event. There is, however, a prospect of unfairness if there is a benefit that is an item of income of the employee, and the cost of that benefit, if it had been met by the employee himself, would have been deductible by him. At least in theory a situation of this kind is possible. The view taken of the expense incurred by the employer—whether it is an expense to increase the competence of the employee in carrying out his work for the employer or is an expense in rewarding the employee—does not provide an answer to the question whether the expense, if incurred by the employee, would have been deductible by him.

[8.55] There may in some circumstances be a question of who has incurred the education expense. An employee may meet the expense with cash or a credit card facility, provided by his employer. In such circumstances the employer has incurred the expense, and the issues are whether the employer can deduct and whether the employee has a benefit that is his income. An employee may meet the expenses from his own resources, under an agreement with his employer that he will be reimbursed. Two analyses of the circumstances are possible. One analysis would treat the employer as having incurred the expense, with the consequences already described. The other analysis would treat the employee as having incurred the expense, which may be deductible as an expense related to the employee’s income. In this case the reimbursement will be income of the employee if the employee’s expense is deductible by him. Alternatively, the reimbursement will be treated as not being income of the employee to the extent that it reimburses what would otherwise be an allowable deduction available to the employee, and deduction will be denied to the employee on the ground that no outgoing has been incurred by him. If the employee is not entitled to a deduction, the reimbursement may none the less be his income. It will not be his income if it can be seen as a contribution to capital. Though not deductible, the expenses the employee has incurred may yet be seen as incurred in the interests of the employer. It will be apparent that the net consequences for the employee may be different depending on the analysis that is followed.

[8.56] The discussion of the deductibility of self-education expenses has so far been confined to expenses that relate to business or employment income. In theory, at least, an expense of education may be relevant to passive income—income derived from property that is not business income. The issue will be whether the purpose of the expense, objectively determined, is to maintain and further the taxpayer’s competence to invest. There is no judicial decision in which the deductibility of self-education expenses claimed to be relevant to the derivation of passive income has been considered.

Expenses of Travel

[8.57] The deductibility of expenses of travel that are expenses of self-education, or the education of an employee, has been considered in [8.38]–[8.56] above. The deductibility of travel expenses depends on their relevance, working character and contemporaneity. In the case of deduction by an employee, tests expressing the principle of relevance will emphasise the obligations of his employment. And relevant travel expenses, whether of a self-employed or an employed person, may be denied deduction as non-working. The possibility of a relevant travel expense of an employee being treated as non-working may be remote. The character of the expense must be judged with reference to the income of the employee, not that of his employer. A relevant travel expense of a self-employed person may well be non-working. Travel expenses associated with a study of the feasibility of establishing a business will be non-working. Travel in seeking to obtain a contract which will be a structural asset of a contemplated or subsisting business will be non-working.

[8.58] Travel expenses must be judged for deductibility by the principle of contemporaneity. The expenses of travel in seeking to obtain a contract that will be an asset of a contemplated business may come too soon. If the contract is not obtained and no business operations are ever entered upon, it is arguable that no business had commenced at the time the travel expenses were incurred. The question whether action taken to establish a business involves the commencement of a business was raised by Southern Estates Pty Ltd (1967) 117 C.L.R. 481 and was considered in [2.442] above. The deductibility of travel expenses in seeking to obtain a contract to provide services, which may be an employment contract, were the subject of comment in [5.46]–[5.47] above.

[8.59] Where an employee’s travel expenses are met directly by his employer, the questions of deductibility by the employer, and the derivation of a benefit that is income of the employee, call for the analysis already attempted in relation to education expenses of an employee met by his employer. The expense may be deductible by the employer (i) as an expense of the employer’s business activity, the expense not being directed to rewarding the employee for his services, or (ii) as an expense directed to giving such a reward. In instance (i), any benefit to the employee is unlikely to be his income—it is a condition of his service. In instance (ii) any benefit to the employee will very likely be his income under s. 26(e). There is again the prospect that the benefit will be his income, though he has no deduction, because he has not incurred any expense.

[8.60] Some of the most debated questions of relevance arise in relation to expenses of travel which involve, wholly or in part, the movement of a self-employed or employed person between his home and a place of work.

[8.61] Lunney (1958) 100 C.L.R. 478 is taken to have settled the question as it arises in the simple case where there is a sole place of work at a distance from the taxpayer’s home or, expressed in the frame of reference of the reasoning in the judgments in the case, where the taxpayer has a home at a distance from a sole place of work. The expenses of travel, it is said, are incurred in order to enable the taxpayer to live away from his work. The reasoning is adopted from the Court of Appeal judgment in Newsom v. Robertson [1953] 1 Ch. 7. Dixon C.J. in Lunney adopted the reasoning with some reluctance, and McTiernan J. dissented. The other members of the court accepted the reasoning without expressing any reservation. Newsom v. Robertson was decided on United Kingdom legislation which requires that the expense be incurred wholly and exclusively for purposes of the trade, profession or occupation. Denning L.J. said (at 16):

An Australian court could have decided that the existence of some purpose that was not a purpose of earning income did not preclude deduction of the travel expenses. Lunney is a decision that the element of purpose to enable the taxpayer to live away from his place of work was of such significance that the expenses were insufficiently connected with the derivation of income. The decision has hardened to a point where it is not open to re-examination for its validity as an expression of the principle of relevance.

[8.62] There is a passage in the judgment of Williams, Kitto and Taylor JJ. in Lunney which calls for some comment:

The passage is the basis of the reasoning of Mason J. in Lodge (1972) 128 C.L.R. 171 referred to in [8.25]–[8.27] above. Child minding expenses may be an “essential prerequisite” to the derivation of income. But their character was “nursery fees for the appellant’s child” and as such they were not relevant to the derivation of income. The analysis is not easily unravelled in either case. It appears that the determination of “essential character” makes possible a conclusion on relevance. The determination of essential character involves the adoption of a description of the expense which affords an answer to the question of relevance. The description in effect asserts the relevance or want of relevance of the expense. The analysis tends rather to cloak than to reveal the process of decision. No analysis can deny the evaluation that must be made in concluding that an expense is relevant or irrelevant.

[8.63] The analysis appears to undergo some change as it is adopted in the judgment of Mason J. in Handley (1981) 148 C.L.R. 182 at 194:

The determination of “essential character”, on the face of this analysis, goes not to the determination of relevance but to the question whether an expense that may be relevant is to be denied deduction because of the private or domestic exception.

[8.64] Lunney and the contemporaneous decision in Hayley (1958) 100 C.L.R. 478 settle, for a self-employed or an employed person, that expenses which are no more than the costs of the taxpayer’s movement between a sole place of work and his home are not sufficiently connected with income derivation to be relevant. The cases are applied in Burton (1979) 79 A.T.C. 4318. But they do not answer the question of relevance in circumstances where:

• (a) where the expenses have another purpose than providing for the taxpayer’s movement between work and home;
• (b) where the movement is a movement between two or more places of work;
• (c) where the movement is between shifting places of work and the taxpayer’s home;
• (d) where the movement is between a place of education and the taxpayer’s home; or
• (e) where the movement is between a home adjacent to an old place of work and a home adjacent to a new place of work.

Each of these situations calls for some examination.

[8.65] An illustration of situation (a) may be an expense of travel when the taxpayer transports equipment he uses at his place of work. The expense of travel may be an expense of safeguarding the equipment, and of using it in his business or employment at home. The cost of transporting a bulky musical instrument in the taxpayer’s station wagon was so characterised by Waddell J. in Vogt (1975) 75 A.T.C. 4073: the taxpayer was employed to play music on the terms that he would provide his own instruments, and would bring them to performances and rehearsals. Allowing the deduction of the expense of transporting the tools and equipment where the taxpayer is carried in the vehicle in which they are transported, will in effect allow the taxpayer a deduction of the cost of his own movement between his home and a place of work. His own movement is, however, a consequence of action to safeguard the equipment and to have it available for use at home. That movement is not the purpose of the expense.

[8.66] An expense which relates to the movement of a taxpayer who is safeguarding equipment will not always be open to this characterisation. A taxpayer who carries files in a briefcase to safeguard them and to have them available to be worked on at home, will find it difficult to establish that the fare for the journey on which he carries the files was paid to safeguard the files and to have them available for work at home. None the less, Waddell J. in Ballesty (1977) 77 A.T.C. 4181 attributed some significance to the fact that the taxpayer carried his football clothes between home and places of training for and playing football. Waddell J. also gave significance to the taxpayer’s claim that the expenses of using his own car were expenses of ensuring that he would be in the right frame of mind for training and playing and were thus relevant. An acceptance of that line of argument would, in effect, reject Lunney.

[8.67] The argument that the taxpayer made, successfully, in Vogt has its parallel in the argument that the use by an employee of a motor car owned by his employer for travel to and from the employee’s home is a use to safeguard the motor car, and that the benefit to the employee in being moved between work and home is a condition of his service and not a reward for his service.

[8.68] Situation (b) is illustrated by Sargent v. Barnes [1978] 2 All E.R. 737. The taxpayer maintained a laboratory away from his dental surgery. A dental mechanic, who was not an employee, worked part time at the laboratory, and the taxpayer called there on his way to and from home to pick up dentures that had been made by the mechanic, and to deliver impressions from which dentures would be made. Oliver J. rejected the argument that the cost of that part of the taxpayer’s travel that was between surgery and the laboratory was deductible. The whole of the expenses of travel between surgery and home remained expenses in order to enable the taxpayer to live away from his work, notwithstanding that he called at the laboratory. Oliver J. professed to look at the matter “realistically”, and concluded that what the taxpayer was doing “was calling to deliver and pick up work on his way to and from the surgery where the practice was carried on”. The case is a recognition that no firm rule can be stated that travel between two fixed places of work is deductible. The taxpayer must on the occasion of movement between the two places be said to carry on work at each place. If there is work carried on at each place on the occasion, deductibility will follow, at least where each place of work is within the same business or employment. Picking up and delivering were not acts of carrying on work at the laboratory. An alternative argument the taxpayer might have made would be that the expenses of travel between laboratory and surgery were expenses of delivering dentures and impressions. The observations made in [8.65]–[8.66] above in regard to Vogt and Ballesty are relevant.

[8.69] Travel expenses between two places of work may be deductible notwithstanding that one of the places of work is the taxpayer’s home. There is a question of the extent and nature of the activity that will amount to the carrying on of work at a place of work. The question is, however, distinct from the question whether the activity when carried on at home would make the expenses considered in the “home study” cases deductible. Where the issue is deductibility of travel expenses, the activity must be carried on at the time of the movement. Where the issue is deductibility of the expenses of the shelter afforded by the home, deductibility depends on the character of the use made of the home during the year of income. And travel expenses may be deductible notwithstanding that the expenses of the shelter are not. Telephone instructions from home to a hospital about the treatment of a patient given by a doctor on call to give such instructions were held to be enough in Owen v. Pook [1970] A.C. 244 to make the taxpayer’s home a place of work, so as to allow a deduction of expenses of travel to the hospital to perform surgery on the patient. It would however be assumed that the giving of such instructions from home does not justify a deduction of some of the expenses of the home as a place of shelter. The insistence in the dissenting judgment of Stephen J. in Handley 148 C.L.R. 182 at 192-3 that Lunney (1958) 100 C.L.R. 478 and Newsom v. Robertson [1953] 1 Ch. 7, and the idea of a “base of operations” at home, cannot be applied to the quite different case of deductibility of home office expenses, is to be preferred to the suggestion in the judgment of Wilson J. in Forsyth (1981) 148 C.L.R. 203 at 215 that they can.

[8.70] In Swinford (1984) 84 A.T.C. 4803 Hunt J. drew a distinction between a concept of a place of work which will justify deduction of shelter expenses, and a place of work which may justify deduction of travel expenses between the place of work and some other place of work. The taxpayer was a script writer who claimed a part of the rent of her flat attributable to a room she used as a home office. She worked at other places only when she attended rehearsals of scripts she had written, or delivered scripts she had written, or picked up instructions for scripts to be written. Hunt J. said (at 4806):

The words “business premises” to identify a home office which will justify deduction of shelter expenses and a “part of (a) home…used for business purposes” to identify a home office that may justify a deduction of travel expenses is helpful, though the words “as a matter of convenience” added to the latter words tend to obscure the analytical distinctions that need to be drawn between (i) business premises, (ii) a place of business and (iii) a home where business work is done. Business premises are premises in a home in which work is done that is beyond any notion of domestic use of premises. The notion of domestic use may include business work—a phrase used in the present context to include employment work. Some business work, even if it be only searching for solutions to business problems, is done at home by almost every person. If work is done that is beyond any notion of domestic use of premises, shelter expenses will be deductible to the extent that they are fairly attributable to the area of the home used, and the time devoted to that work.

[8.71] A place of business will identify a place in a home where business work is done that cannot be described as work done in that place simply as a matter of convenience. The taxpayer in Owen v. Pook ([8.69] above) might be said to have had a place of business at home. Business premises will be a place of business only while business is done in the business premises. If a taxpayer has a place of business at home he will be entitled to a deduction of travel expenses from his home to another place of business outside his home, if the travel follows immediately on the doing of the business work at home, and the expenses are otherwise deductible as expenses of travel between two places of work.

[8.72] A home where business work is done will identify a home where work is done that is not of a kind that may make a home business premises or a place of business. A home where business work is done will not justify a deduction of shelter expenses nor will it justify a deduction of travel expenses. The work is such that it is no more than work conveniently done at home, or work described as work “taken home” in Newsom v. Robertson. Work that will make home a place of business might by one test be identified as work that “needs” to be done at home, because some part of the home has been adapted to the doing of that work. The adapting will have converted part of the home to business premises. Work in a doctor’s surgery at home is the obvious illustration. Another test may be that there is no other place where the work can conveniently be done, which would explain Horton v. Young [1972] Ch. 157 referred to in [8.75] below and would make the place of work in Swinford a place of business.

[8.73] In Owen v. Pook [1970] A.C. 224 deduction was claimed and allowed of expenses of travel between home and hospital incurred on those occasions when telephone instructions had been given by the taxpayer. The taxpayer might be said to have had a place of business at home. Lord Donovan, who dissented and would have denied the deduction of the travel expenses, confused the concept of place of work for purposes of travel expenses—a place of business—which calls for a judgment on activity at the time of the travel, and what may be the concept of place of work—business premises—for purposes of deductibility of home shelter expenses, which calls for a judgment on activity over the year of income. Lord Donovan said (at 261):

The consequence of the decision in Owen v. Pook in the circumstances envisaged by Lord Donovan would be deductibility of expenses of travel only on those occasions when the employee is in fact summoned to go to the factory to cope with some emergency, and he gives telephone instructions as to what should be done before leaving home.

[8.74] It is true that in Newsom v. Robertson [1953] 1 Ch. 7 the issue of deductibility of expenses of travel between home and a place of work is put in terms of the home being a “base” of “operations”. The language may help to emphasise that there is a question of the extent and nature of activity at home that will be sufficient to make home a place of business for purposes of a rule allowing deduction of travel expenses. Newsom v. Robertson is authority that working on matters “taken home” is not enough to justify a deduction for travel expenses on the occasion when work is taken home. No authority would be necessary to deny a deduction of travel expenses on those occasions when work is not taken home. The fact that home may on some occasions be a place of business does not make it a place of business on those occasions when no work is in fact carried on at home.

[8.75] The view of activity at home that will be sufficient to make it a place of business taken by Waddell J. in Ballesty (1977) 77 A.T.C. 4181, would virtually reject Lunney (1958) 100 C.L.R. 478. The taxpayer was a professional footballer who claimed the expenses of travel between home and places where he trained for matches, or played in matches. Waddell J. said (at 4185): “I think that on the whole the taxpayer should be regarded as having embarked upon the activities by which he earned the assessable income when he left his home to travel either to a match or to training and as continuing in those activities on his journey home. In this sense his place of residence should be regarded as his base of operations.” The intention would appear to be to bring the circumstances within Owen v. Pook. But the rule in Owen v. Pook [1970] A.C. 244 is clearly not wide enough to extend to the facts in Ballesty. Waddell J. referred to Horton v. Young [1972] Ch. 157. In that case, the Court of Appeal found that the taxpayer engaged in activities at home sufficient to make it a place of business. It was “the locus in quo” of his trade, the “business base” or “centre of activities”. The taxpayer was a self-employed bricklayer who employed a team of other bricklayers and contracted to carry out building work. He would conclude contracts at home, in writing or by telephone, and would instruct members of his team. A conclusion that the taxpayer had a place of business at home was open on the facts in Horton v. Young, but was not open in Ballesty.

[8.76] It is true that there are observations in the judgment of the Court of Appeal in Horton v. Young which suggest that a taxpayer will always have a place of business at home if he works at shifting places away from home, as a building worker does. But the taxpayer who travels between home and shifting places of work does not need to show that his home is a place of business to establish the deductibility of his travel expenses. In Horton v. Young, Brightman J. at first instance, said (at 163–164):

Like observations may be made with equal force in regard to an employee with shifting places of work. The expenses in these circumstances are deductible because the rule in Newsom v. Robertson and Lunney has no application. It is not a case of travel between places of work. It is a case of expenses which cannot be described as a consequence of the taxpayer’s choosing to live away from his work. At least this is so when the taxpayer’s work is itinerant within a certain area. Where his home is outside the area, Brightman J. left open the possibility of concluding that the expenses of travel should be denied deduction so far as they relate to travel to and from the border of the area.

[8.77] The discussion so far has proceeded on the assumption that the expenses of travel between places of work relate to places of work within the same business or employment. It may be argued that travel between a place of business of one business or employment and a place of business of another business or employment is to be differently regarded. It would be agreed that the expenses of that travel are not undertaken to enable the taxpayer to live away from a place of work. If any judgment is made of that kind, it is that they are undertaken to enable the taxpayer to work in another business or employment and should be regarded as relevant to one of them, though to which one is not obvious. In Garrett (1982) 82 A.T.C. 4060 the taxpayer was in business as a farmer at his home, and as a medical practitioner in a number of towns including his home town. He travelled in his own aircraft between these places. The fact that he had a medical practice in his home town obscured the question of deductibility now considered.

[8.78] Deductibility must, however, be dependent on actual work in each place of business on the occasion of travel. A taxpayer who has a place of business at home in relation to one business or employment and a place of business in relation to another business or employment elsewhere, will not be entitled to a deduction of the cost of travel on an occasion unless the travel follows immediately on the performing of work in his business at home, and there is work performed on arrival at the place of the other business. If he were held entitled to a deduction in all circumstances, Lunney would be rejected. The physical presence of the taxpayer at a place of business which is a consequence of the fact that he has a place of business at home, is not enough to justify deductibility of travel expenses between home and another place of business. The decision of Oliver J. in Sargent v. Barnes [1978] 2 All E.R. 737 has a bearing.

[8.79] Situation (c) concerns expenses of travel where the movement is between the taxpayer’s home and shifting places of work. The view was expressed above that such expenses are deductible, not because the home is in any sense a place of business, but because the reasoning in Lunney is inapplicable: it is appropriate to regard the expenses as a consequence of the location of the places of work. The footballer in Ballesty was entitled to deductions not for the reasons given in the judgment, but for the reasons given by Brightman J. for allowing the deductions at first instance in Horton v. Young. The observation by Lusher J. in Garrett (1982) A.T.C. 4060 at 4063 that a commercial traveller is entitled to deduction for expenses of travel from home because he keeps samples at home is misleading. He is entitled to deductions of travel expenses because shifting places of work dictate that he travel. The relief schoolteacher who may be asked to teach at a different school each day is entitled to deductions. There is a possible qualification suggested by the judgment of Brightman J. in Horton v. Young [1972] Ch. 157 which would confine deductibility to travel which is within the borders of the area in which the shifting places of work are to be found. The words “to the extent to which” in s. 51 would be relied on in the application of the qualification. However the problems of identifying the area, more especially when the business operations of the taxpayer or his employer are international, will discourage the adoption of the qualification.

[8.80] Situation (d) concerns expenses of travelling between a place of education and home. Assuming that the expenses of self-education are in a particular case deductible, there is a question of whether travel expenses are to be included in the deductible expenses. Such expenses were allowed in Finn (1961) 106 C.L.R. 60 without any reference to the fact that the travel was from home. As in the shifting places of work situation, the expenses are not undertaken in order to enable the taxpayer to live away from his work. It will follow that the travel expenses of a taxpayer who goes from his place of work to a place of education and thereafter to his home are deductible, if other expenses of the self-education are deductible.

[8.81] Situation (e) concerns travel from a home adjacent to an old place of work to a home adjacent to a new place of work. The employee who meets his own travel expenses when he is asked by his employer to change his place of work from one city to another may claim the expenses of his own travel, notwithstanding that the travel begins and ends at a home. In the circumstances the travel should be seen as travel between two places of business. Expenses of moving his household effects and the travel expenses of members of his family raise different issues. They are not relevant. Which is not to say that the tax law will treat a reimbursement to the employee of such expenses as a derivation of income by the employee. The view was taken in [2.120]–[2.121] above that a reimbursement in these circumstances, or an allowance to meet the expenses, or a direct payment by the employer of the expenses, is not income: it is a contribution to capital.

[8.82] Where the movement is made necessary by the fact that the taxpayer has accepted a new employment, neither his own travel expenses nor any of the other expenses referred to that are associated with the move appear to be deductible. In the case of the taxpayer’s own travel expenses relevance may be doubted. Lunney may be thought applicable. A reimbursement of all the expenses by the new employer may, however, be regarded as a contribution to capital, and thus not income, unless it is held that this would be to reject Lunney.

Expenses of Entertainment

[8.83] The deductibility of expenses of entertainment raises a question of relevance to the derivation of income. Where the taxpayer is an employee, the expense must be relevant to the derivation of his employment income, not the income of his employer.

[8.84] n this area, as in the area of self-education expenses, there are no doubt good reasons in policy, perhaps stronger reasons, why relevance should not be too readily accepted. Entertainment of others may well be recreation for the taxpayer who entertains, and a tax subsidy for expenses of recreation is not the intention of s. 51(1). In the United Kingdom there is a statutory prohibition on deduction of business entertainment expenses (s. 41 of the Income and Corporation Taxes Act 1970).

[8.85] Relevance is again a matter of sufficient connection with the derivation of income, and the purpose of the taxpayer will be the focus of any judgment. How far purpose is a matter of objective inference, and how far subjective purpose has a bearing, are questions already considered. That there were mixed purposes, some of them not being purposes of securing the derivation of income, will not necessarily preclude deductibility. It might be argued that the expenses should be apportioned, so that they are denied deduction to the extent that they have a purpose other than the derivation of income, for example a purpose to enjoy conviviality. Apart from the administrative difficulty in applying apportionments in such circumstances, an apportionment will be used as a way of expressing a doubt about the relevance of an expense. A preferable view of the entertainment expense, the health expense referred to in [8.16] above and the travel expense referred to in [8.51] above, is that it must be the subject of a single judgment. Thus an entertainment expense that may be said to be predominantly to obtain the enjoyment of conviviality should be judged irrelevant as to the whole of its amount. An expense whose purpose is predominantly to further the functions that belong to an employee’s office as an academic— Sharma (1984) 84 A.T.C. 4260—should be judged relevant as to the whole of its amount.

[8.86] Deductibility of the self-employed’s expenses of entertainment will depend on the existence of a purpose to maintain and further goodwill of the business, or to secure action from the person entertained in the interests of the business. In the case of an employee’s expenses, the like purposes are not necessarily such as will ensure deductibility. Connection with the employer’s income does not of itself establish connection with the employee’s income.

[8.87] There are two Australian judicial decisions on the deductibility of entertainment expenses, both involving employees. They are Frankcom (1982) 82 A.T.C. 4599 and Sharma (1984) 84 A.T.C. 4260. The failure of the taxpayer—a magistrate—in the first case to establish deductibility, and the success of the taxpayer—an academic—in the second, may indicate that the notion of relevance in this area is subtle. In both cases the purpose that might establish deductibility was the maintaining of good relations with professional colleagues. In Frankcom deduction was denied of expenses of entertaining visiting judges and magistrates and other lawyers. In Sharma deduction was allowed of expenses of entertaining visiting judges and academics, and local colleagues. Neither case insisted on a test of relevance which might be thought to have been established by Hatchett (1971) 125 C.L.R. 494, in relation to self-education expenses, which would require that there be a term of the contract of employment, perhaps an express term, that the employee should incur the expenses. In both cases there is, however, a test that might be expressed in terms of the functions of the office, and the differing outcomes may be explained on the basis that maintaining good relations with colleagues does not further the carrying out of the functions of the office of magistrate, at least not in the degree to which it furthers the functions of an academic. In Sharma the taxpayer was also successful in being allowed the deduction of expenses of entertaining students. The entertaining of visitors, local colleagues and students was seen as contributing to the acquisition and spreading of knowledge which are the principal functions of an academic.

[8.88] The ignoring of any test of relevance which might be described as a term of the contract of employment test—foreshadowed in Wilkinson (1983) A.T.C. 4295 in regard to self-education expenses, and in Martin (1984) A.T.C. 4513 in regard to child care expenses—is a happy development. A term of a contract of employment can always be arranged. The cases are notable in another respect. There is no suggestion that the expenses might have been denied in part so as to reflect the purpose of enjoying conviviality which must have been present, at least in the Sharma case. In the view of this Volume an apportionment ought not to be used as a way of expressing a doubt about relevance.

[8.89] An entertainment allowance paid by an employer to his employee will generally be income of the employee. And a reimbursement of entertainment expenses incurred by the employee will generally be income of the employee. Deductibility of the expenses will depend on their relevance. If they are not deductible there may be room for a submission that the reimbursement, or indeed an allowance in respect of entertainment expenses, is not income because it is a contribution to capital, in the meaning of those words explained in [2.113]ff. above. The contribution to capital principle assumes that the expense in relation to which the contribution was made was an expense incurred in the interests of the employer—as in Hochstrasser v. Mayes [1960] A.C. 376— which is not necessarily a test of deductibility by the employee. The contribution to capital principle rests on the basis that there is no gain by the taxpayer when he receives an amount in respect of an expense that he incurs in furthering the interests of the person from whom he receives the amount.

[8.90] In [8.53]ff. above there is a discussion of the consequences that may flow when an employer meets directly the costs of education of his employee. There is a prospect that the education provided by direct payment by the employer involves a derivation of a benefit which is income of the employee, while the employee is denied a deduction of an expense because he has not incurred any expense. There is some prospect of the like kind in regard to entertainment expenses met directly by the employer. It may, however, seem unlikely that the employer’s action in meeting the expenses would be regarded as conferring a benefit on the employee, as distinct from providing a condition of employment, in circumstances where the expenses if incurred by the employee would be deductible by him.