CATCHWORDS Income Tax - loss or outgoing - deductibility of Licence fee for use of study in residence - Income Tax Assessment Act, 1936 s.51 Commissioner of Taxation of the Commonwealth of Australia v Neil Harry Mark Forsyth Coram: Bowen C.J., Deane and Fisher JJ. Date: 5 May 1980 Place: Melbourne IN THE FEDERAL COURT OF AUSTRALIA ; YICTORTA DISTRICT REGISTRY No. VG 42 & 4% of 1979 GENERAL DIVISION Ou) APPVAL FROM SFE STPRELIE COURT OF VICTORTA BET IEE: COMMTSSTOWER OF TAXATION OF BEE COMMONSBALLE OF AUSTRADIA appellant AUD: NEIL, HARRY MARE FORSYTH Respondent oO RD ER JUDGES IAKTITG ORDER: Bovren O.7,., Deane and Fisher JJ. DATE OF ORDER: 5 ilay, 1980 WHERE TiADE: Melbourn? THE COURT ORDERS PHAR: ° Appeal dismissed, =) Avpellant to pay Respondentts costs of the appeal. ine] ° TT THe FEDERAL COURT OF AUSTRALTA VICTORIA DISTRICT RBGISSRY Mo. VG 42 & 45 of 1979 eed GEITERAL DIVISTON ON APPEAL FROM SHE SUPRET3 COWRT OF VICTORIA BETEMT: COMMISSTONER OF TAXATION OF THE COMMOMVEAGCH OF AUSTRALIA Appellant AIM NETL HARRY TARK FORSYTH Respondent CORAM: Bowen C.oJ.o, Deane and Fisher JJ. Monday 5 May, 1930 REASOWS FOR IUDGWEIT The Commissioner of Taxation appeals, by leave, from a decision of the Supreme Court of Victoria (Murphy J.) confirming a decision by a Taxation Board of Review that the respondent Neil Harry Mark Forsyth ("the taxpayer") was entitled to the benefit of a deduction pursuant to the provisions of the Income Tax Assessment act, 1936 ("the Act") in the. ascertainment of his tavahle ineome of each of the tax years ended 30 June, 1974 and %0 Jnne, 1975. The disputed deductions are in resnect of payments made by the taxpayer for the occupation of "one room ... 31:4 such ancillary space and facilities as he might reasonably require from time to time for the pvvrpose of hi: professional practice as a barrister", The room in question was a room used, by the taxpayer, as a study in the belbovrne residence occvpied by himself and his family. The ta:paver is a member of the Victorian Bar. At velevant times, he carried on practice in Melbourne from city chambers, <A large part of hic nrartice consisted of advising work and he frequently worked at his home at night. Less freauently, he worked at his home on week-ends,. The taxpayer and his wife were, at relevant times, the trustees of a family trust, As such trustees, they purchased a house in Berry Street, "ast Melbourne, Complet-— ion of the purchase took place on % September, 19735 on which day the taxpayer and his wife moved into the house, Some two weeks before completion, the taxpayer and his wife had held a meeting as trustees at which they resolved, inter alia: "3, %It was agreed that the Trustees would permit Y.HoM. Forsyth to oceypy one room in the said premises as a study, together with such ancillary space and facilities as he might reasonably require from time to time for the purvoses of his professional practice as a barrister; and that he would oay there- -3- for the sum of 'i320 rer week or such other svm - as might be mutually agreed upon from time to time. 4. It vas agreed that thr Trustees would permit T.HoM, Forsyth to oeerny the remainder of the premises as a residerce vnon the terms that so long as he was the occupier of the property: (2) he paid all ovtsoings, and kept the premises in proper rep91r; (b) he paid the interest under the said mortgage; and (c) he made no demend for the moneys advanced by him to the Terstees'", An upstairs room in the house iac designated as the taxpayer's study, Its furnishings included hook cases in which the taxpayer kept a basic reference library. The "ancillary space and facilities" apparently consisted of an alcove on the ground floor of the residenee in which a desk was placed. Yo suggestion is made on behalf of the appellant Commissioner that the transaction between the taxpayer and his wife as trustee and the taxpayer in his personal capacity was other than genvine and effective. Indeed, it was conceded by the Commissioner that the taxpayer was a "tenant" of the room used as a study and that, pursvant to the arrangement set out in the avove resolution of the trustees, he made payments of "rent" to the extent of "840 in the year ended 30 Juae, 1974 and "1040 1n the year ended 30 June, 1975. Votwithstanding that concession, it would appear to be more accurate to describe the taxnarer as a licensee of the relevant room and facilities and to describe the fees yhich he paid as lacence fees rather than rent, In additiroa to ats vse as a study, the svbject room was also used by the taxpayer for keeping his personal clothing and as a dressing voom. The primary use of the room was hovever by the taxpayer for the purposes of professional work and it is conceded by the Commissioner "That the relevant srea vas used entirely for professions] .»rposes, that is to say, vorking on briefs, reading for legal purposes, and othervrise in relation to the texpayer's practice es 3a barrister", This concession was stoited, however, not to obscure the fact that the room vas used by the taxpayer for the non-professional purposes miitiosed and, at least in that regard, constituted part of his overall residence, The question involved in the appeal is whether the texpayer was entitled to a deduction of the chove amounts of $840 and $1040 in ascertaining the taxahle ancome of the tax years in which they were paid. Section 51(1) of the Act provides: "AL losses and outgoings to the extent to "hich they are incurred jin gaining or producing the assessable income, or are necessarily incurred in carrying on a busiress for the purpose of gaining or producing such income, shall be allovrable deductions ercent to the extent to which they are losses or outgoings of capital, or of a canital, private or domestic nature, or are incurred in relatior to the gaining or production of exempt incone", By s.6 of the Act, "business" is defined as includ- ing any profession, The taxnayer carried on his practice as a barrister for the purpose of earning assessable income. Plainly, for the purnoses of ¢.51(1), the texpayer, in carrying on his profession, carried on "a business for the purvose of gaining or producing svch income", The issues petween the taxnayer and the appellant Commissioner are -5- whether the ovtgoings in question "ere incurred in gaining or praducing the taxpayer's assescable income or were necessarily inevrred in carrying on the taxpayer?s "business" and, if they were, whether they .ere ovntgoings of a capital, vrivate or domestic cnsracter. The ovtgoings an question were incurred by the taxnaver as the orice of his use nf the study and encillary space and facilities, It is common fround between the parties that that use was "for vrofessionel purposes, thet is to tay, Working on briefs, reading fnr legal purposes, and otherwice in relation to the ta:mayer's practice as 2 barrister". In the vords of the recolution of the Trustees, it was "for the nurposes of his professional practice as a barrister", In these circumstancen it is clear that the relevant outgoings vere both inenered by the taxpayer in gaining and projucing assessable inrame and necessarily incurred in the course of carrvirg on his profession (i.e. "ta pusiness") for the purposes of zAining or producing such income, There remains for consideration the question whether the outgoinss vere of a capital, private or domestic nature and, for that reason, within the exclusion of the proviso to s.51(1). For the Commissioner, reliance was placed unon the decisions of Walsh J. in Thomas v, Federal Commissioner of Qaxation ((1972) 46 4,L.7.R. 397) 7n' lason J. in Federal Commissioner of Taxation vy. Farchney ((1972) 129 C.UR. 38), hose cases are, however, cleazly distinguishable from the present case, In Thomas' Cace (supra), the tazx- payer, who was a barrister, sought a deduction in respect of pert of the interest payable rrda*r a loan which 12d been raised and expended partly for the rurpose of adding to his house a study which was devoted to use for professional purposes, In Faichney's Case (supra), the taxvayer, who claimed a deduction in respect of part of the interest vay- able under a loan which had been raised and expended in the erection of a house containing a syndy used for the purposes of his work, The dedvction inspect of a part of the interest was disalloved in both cases, In each case it was held that the ovtgoing claimed as a de*vetion was "of a capital, private or domestic raturc" within the meaning of s.51(1). The study was part of the taxpayer's residence, The outgoing related to the erection or extension of the resifence. It was of a capital, private or domestic aature rerardless of whether the study was used, in the case of the barrister, for professional pvrpuses or, in the case of the scientist, for the purposes of his work. In Faichney's Case (supre), the taxpayer also claimed a deduction in respect of the cost of lighting and heating his study. The outgoing in respect of lighting and heating the study constituted part of a larger outgoing in respect of lighting and heating the residence as a whole. It was, however, possible to aonortion part of that outgoing to lighting and heating the study and to isolate that part from the overall cost of heating the residence as a whole in a way which was not possible in the case of interest ~7- paid on moneys borrowed to ensble (be erection of Lhe tax- payer's residerce, iioneys paid on beating and lighting the study could be directly related tn the use made of the study for the purvoses of the tavnaver'ts work and therefore could not be characterized as of a nrivate or domestic character, Outgoings by way of interest on money borrowed to enable the erection of the ceside.ce remained of a private or domestic nature even though they eonld in part be related to a separate section of that rersiverce which was vsed for the purposes of the taxpayer's work, Nason J. held, that the deductions claimed in resnect of Lighting and heating the study were properly allovable under s,51(1) of the Act. In the present case, the relevant outgoings were inevrred in respect of the use hy the taxpayer of the study and associated facilities for professional purposes, They did not, as in the above-mentioned cases, constitute part of a lerger payment which could, in its entirety, be related to the taxnayer's purchase, erection nr extension of his residence, No question of apportionment arises end it is not possible to charecterize the ontsoing in resnect of which a deduction is claimed by reference to a larger out going of which it formed part. If the relevant outgoings are, in the present case, to be excluded from the provis- ions of s.51(1) for the reason that they are of a "capital, private or domestic natvre", it must be because they are of that nature in themselves and not by treason of their con- stituting part of larger outgoings which can, in their entirety, properly be so described, The ovtgoings in the present case were incurred as the. cost to the taxnayer of uciv ., for professional pur- poses, part of a residence held by the taxpayer and his wife as Trustees under a family trvst. Trne it is that the study and those associated facilities can nroperly be regarded as part of the residence which the wepayer and his family occupied. That is not, however, to the point in the present case for the reason that the parvmenis were not related either to the residence as a whole or in the general use by the taxpayer and his family of that ressdence as their home, In this regard, the outgoings vere more akin to the payment of the cost of lightang and heatirg the study in Faichney's Case (swora) than to the payment of part of the interest on the money borroved to permit the erection of the house, They were specifically and genuinely for the use by the taxpayer of the study and associated faciltiies for professional pur- poses, that 1s to say, for the purosose of earning assessable income. They vere revenue outgoings of a professional or business nature and were nov outgfoinss of a capital, private or domectic nature, They vwerm oarecnorly deductible pursuant to the provisions of ¢.51(1). The Commissioner's anoealn should be dismissed with costs. I hereby certify that this and the foregoing seven pages are a true copy of the reasons for judgment of the Court. A ASSO TE DATE: 5.5.1980