Taxpayers cannot claim child care or nursery expenses as deductions under s 51(1) merely because such expenses are necessary to enable them to earn income; the expenditure must be incurred 'in' the income-producing activity itself.
Later decisions that cite Lodge v Federal Commissioner of Taxation
Decisions cited by Lodge v Federal Commissioner of Taxation
LODGE v. FEDERAL COMMISSIONER OF TAXATION. [1972] HCA 49; (1972) 128 CLR 171
Income Tax (Cth)
High Court of Australia.
Mason J.(1)
CATCHWORDS
Income Tax (Cth) - Allowable deductions - Woman taxpayer - Clerical work performed by contract mainly in taxpayer's home - Nursery expenses for child of taxpayer - Whether incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing such income - Whether of private or domestic nature - Income Tax Assessment Act 1936-1971 (Cth), s. 51 (1).
HEARING
Melbourne, 1972, October 3, 16. 16:10:1972DECISION
October 16.
2. In support of her appeal Miss Lodge gave oral evidence which I accept.
The effect of her evidence was that the expenditure in
question was incurred
for the purpose of enabling her to devote time and attention to the
preparation of bills of cost which she
undertook mainly at home and for three
weeks in the year at a solicitor's office. She worked under contract for a
partnership known
as Law Cost which prepared common law bills of cost for
solicitors in Melbourne. She was not an employee of the firm and her
remuneration
was in the form of a commission of four per cent on profit costs.
(at p173)
3. In the year ended 30th June 1971 the appellant lived on her own in a flat
in a suburb of Melbourne. The flat was sufficiently
large to enable her to
undertake her work there. The work involved an examination and analysis of
solicitors' files. It is agreed
that of the total sum expended on nursery
fees an amount of $42 was referable to the period of three weeks during which
she worked
in the office of a solicitor and not at home. (at p173)
4. The appellant said that she had hoped that she could do her work and earn
a satisfactory income without sending Deborah to a
child nursery. However,
events proved that this was not possible. She found that Deborah, when not
sleeping, demanded continuous
attention and was a source of distraction,
making it impossible for the appellant to devote herself to her work. The
time available
for work outside Deborah's sleeping hours was insufficient for
doing the volume of work which the appellant wanted to undertake and
which was
necessary to enable her to earn a sufficient income. Accordingly, to enable
her to do her work and do it efficiently,
she placed Deborah in the child
nursery. In July 1970 Deborah was placed in the nursery for two days a week
and in August of that
year until the end of June 1971 she was placed there for
five days a week. (at p174)
5. To qualify as an allowable deduction under s. 51 (1) of the Income Tax
Assessment Act 1936-1971 (Cth) it must appear that the
item of expenditure was
"incurred in gaining or producing assessable income" or was necessarily
incurred "in carrying on a business
for the purpose of gaining or producing"
such income. The meaning of these expressions has been elucidated in a variety
of cases,
some of long standing. The expressions prescribe tests which are
different, but the first expression covers almost all the ground
occupied by
the second (Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal
Commissioner of Taxation [1949] HCA 15; (1949) 78
CLR 47, at p 56
). (at p174)
6. Mr. Aickin for the taxpayer has placed emphasis on the statements made in
the decided cases which say that for an item of expenditure
to fall within the
first expression it must be incidental and relevant to the activities or
operations carried on for the production
of income. However, as Williams,
Kitto and Taylor JJ. pointed out in Lunney v. Federal Commissioner of Taxation
(1958)
100 CLR
478,
at p 497 , these statements did not constitute "an
exclusive and exhaustive test for ascertaining the extent of the
operation
of
the section". As their Honours observed, this is made clear by the judgment of
the Court in Ronpibon Tin N.L. and Tongkah
Compound
N.L. v. Federal
Commissioner of Taxation (1949) 78 CLR, at pp 56-57 . The passage on which
reliance was placed for the
taxpayer
in this case is:
"For expenditure to form an allowable deduction as anBut it is immediately followed by the observation:
outgoing incurred in gaining or producing the assessable
income it must be incidental and relevant to that end."
"The words 'incurred in gaining or producing the assessableLater, it was said:
income' mean in the course of gaining or producing such
income."
"In brief substance, to come within the initial part of the
subsection it is both sufficient and necessary that the occasion
of the loss or outgoing should be found in whatever is productive
of the assessable income or, if none be produced,
would be expected to produce assessable income." (at p174)
7. The rejection in Lunney's Case (1958) 100 CLR 478 of the claim that the
expenses of travelling between home and
work was
an
allowable deduction was
based on the proposition that it is not enough to show that the expenditure
was an essential
prerequisite
to the derivation of assessable income. The
decision denied the notion that an expense was incidental and relevant
to the
derivation
of income merely because it was necessary in that sense. The
decision turned rather upon a view of the character
of the expenditure
incurred. (at p175)
8. This approach to s. 51 (1) is founded largely on the presence of the word
"in" in the principal parts of the subsection. That
this is so is
appropriately illustrated by Halstead (H.M. Inspector of Taxes) v. Condon
(1970) 46 TC 289 , a decision on a question
arising under Sch. E. to the
Income Tax Act 1952 (U.K.) in circumstances similar to the present case.
There it was held that a widower
was not entitled to a deduction in respect of
payments made to persons who minded his two children so as to enable him to
perform
his work and earn income. The relevant English provision was more
narrowly expressed than s. 51 (1) because it entitled an employee
to a
deduction if he was necessarily obliged "to expend moneys wholly exclusively
and necessarily in the performance" of the duties
of his employment (Income
Tax Act 1952, Sch. 9, par. 7). It was held that the taxpayer was not entitled
to the deduction. (at p175)
9. Megarry J. said (1970) 46 TC at pp 292-293 :
"The Commissioners considered and distinguished Bowerscourse of
v. Harding (1891) 1 QB 560; 3 TC 22 on the ground that an alternative
action was there open to the taxpayer, whereas here the taxpayer
had none. That case, however, deals only with the word
'necessarily'. There is still the word 'in', governed as it
is by 'wholly' and 'exclusively'. Even if one accepts the
highest degree of inevitability in what the taxpayer did, in
no conceivable sense can the expenditure be said to have been
incurred by him 'in' the performance of his duties: it had
nothing to do with the way in which he performed his
functions as a clerk to the Borough Council." (at p175)
10. In the light of the authoritative observations concerning s. 51 (1) made
by this Court in its earlier decisions I have no alternative
but to arrive at
the conclusion that the appellant's claim in this appeal cannot succeed. The
expenditure was incurred for the purpose
of earning assessable income and it
was an essential prerequisite of the derivation of that income. Nevertheless
its character as
nursery fees for the appellant's child was neither relevant
nor incidental to the preparation of bills of cost, the activities or
operations by which the appellant gained or produced assessable income. The
expenditure was not incurred in, or in the course of,
preparing bills of cost.
(at p176)
11. If the appellant's case is approached on the footing that she was
carrying on a business, because she was not an employee of
Law Cost, the
result in my opinion is no different. If it be correct to say, as I have
held, that the expenditure was not incurred
in preparing bills of cost, it
follows in this case that it was not incurred in carrying on the business of
preparing such bills
of cost. (at p176)
12. 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. (at p176)
13. However, I should express my view that the expenditure in question was of
a "private or domestic" nature and for that reason
is excluded by 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) and there is accordingly no relevant reason for holding the
expenditure
to be other than private or domestic expenditure on the care of
the appellant's child. I express no opinion on the question whether
an
expenditure which is incurred in gaining or producing assessable income may
nevertheless be of a "private or domestic" nature.
(at p176)
14. Although the expenditure which the appellant incurred in placing her
daughter in a nursery was necessary to enable her to earn
her income, that, as
I see it, is not enough to satisfy the requirements of the law as it is
expressed in s. 51 of the Act and as
it has been interpreted. (at p176)
15. In the result I dismiss the appeal and confirm the assessment. (at p176)
ORDER
Appeal dismissed. Assessment confirmed.
Usual order for exhibits.