Deductibility of travel expenses: Is Australia moving from a global to a schedular income tax?
GUMMOW J: It seems to me that logic is not going to help you. The only thing that really helps you are the considerations that moved Sir Owen Dixon.
GLEESON CJ: The proposition there has been too much water under the bridge. (1)
The decision of the High Court in Payne, (2) handed down on 8 February 2001, concerned whether expenses incurred by the taxpayer in travelling between two unrelated places of work were allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth) in determining the taxable income of the taxpayer. The High Court, by majority (Gleeson CJ, Kirby and Hayne JJ), disallowed a deduction for travel expenses claimed by Mr Payne, who was a full-time pilot, between his place of employment as a pilot and his full-time business of a deer farm, at which he also had his home.
The High Court decision in Payne was delivered after the Administrative Appeals Tribunal (`Tribunal') and four judges in the Federal Court had voiced significant differences of opinion. The Tribunal found for the Commissioner of Taxation that the travel expenses were not deductible. (3) On appeal by Mr Payne to the Federal Court, Foster J found an error of law and remitted the case to the Tribunal. (4) The decision of Foster J was upheld by majority in the Full Federal Court (Sackville and Hely JJ), albeit on slightly different reasoning from that of the primary judge; Hill J dissented. (5) The Commissioner appealed to the High Court, which by majority joint judgment overturned the Full Federal Court decision. Gaudron and Gummow JJ wrote a joint judgment in dissent.
Others have already written in considerable depth on deductibility of travel expenses and on the Payne case. (6) In his article discussing the Federal Court decision in Payne, Stephen Barkoczy correctly predicted the High Court result in his analysis which traced the narrow approach to characterisation taken by the High Court, particularly in respect to the boundary between personal or private expenses and working deductible expenses. (7)
This note analyses the Payne case in the context, first, of the history and structure of Australian income tax law and, second, of the fundamental distinction between public and private that underlies the income tax system. Is it true that `logic' cannot help us in considering the deductibility of travel expenses? (8) Must deductibility of such expenses in situations like that of Mr Payne be decided solely on the basis that `them has been too much water under the bridge'? (9) What is the `logic' underlying our income tax law and can it be applied consistently in the myriad of different factual situations that must arise in our diverse work (and travel) practices? What are the policy goals that are motivating the courts in this well-travelled area of law -- and are these policy goals adequately articulated in judicial decisions?
The note first sets out the facts, an overview of the current state of the law and discussion of the various court decisions in Payne. I then analyse the approach of the High Court majority, as compared with that of the dissenting judgment in the High Court and the Federal Court majority.
II THE FACTS
Mr Payne claimed a total of $15 510 in deductions for the fiscal years ending 30 June 1991 to 30 June 1994 under s 51(1) of the Income Tax Assessment Act 1936 (Cth). This sum represented expenses incurred by Mr Payne in travelling between the place of his farming business and residence, and the place of his employment as a pilot. Mr Payne travelled from the property to the airport approximately 40 to 50 times during each of 1991, 1992, 1993 and 1994. In 1991, Mr Payne claimed $2092, in 1992 he claimed $2988, in 1993 he claimed $5337, and in 1994 he claimed $5093.
On 13 December 1995, the Commissioner issued amended assessments for Mr Payne in respect of the years 1991 to 1994, disallowing the deductions. Mr Payne objected to the amended assessments; the Commissioner did not allow his objections. Mr Payne sought review of the Commissioner's decision in the Administrative Appeals Tribunal, (10) arguing that his travel expenses were deductible on the basis that his travel was between a place of business and a place of employment.
The Tribunal found that the facts were not in dispute. It accepted that Mr Payne resided on a grazing and farming property near Tamworth in New South Wales, (11) which he acquired in 1987. From 1991, Mr Payne farmed deer on the property. The deer-farming activities amounted to the carrying on of a business and the property constituted a place of business. The Tribunal accepted that Mr Payne was also employed by Qantas in a full-time capacity as a pilot. He was based at Mascot airport in Sydney. (12) Mr Payne held the rank of captain and had for many years commanded international flights.
Mr Payne organised his flying duties with Qantas such that he was absent from the farm for about three days a week and present at the farm for the remaining four days. Mr Payne usually travelled to the airport using a car, bus and train. Immediately prior to and whilst leaving the property to travel to the airport, as well as immediately upon arrival at the property when returning from the airport, Mr Payne engaged in farming activities. He also carried out work associated with the deer farm while in a foreign port awaiting a return flight to Australia. The Tribunal also accepted that Mr Payne would not have lived at the farm if he did not carry on business there, (13) and Mr Payne's earnings as a pilot were necessary for the financing of the farm.
III THE STATE OF THE LAW BEFORE PAYNE
A The Case Law
The general rule for determining allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth) states relevantly as follows: (14)
All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature ...
The interpretation of s 51(1) has exercised the minds of taxpayers, Commissioners of Taxation and the courts for decades. As stated by the majority judges in both the Federal Court and the High Court in Payne, the general principles are familiar. (15) Section 51(1) is said to have two positive limbs. Under the first limb, losses and outgoings `incurred in gaining or producing the assessable income' are deductible; under the second, losses or outgoings `necessarily incurred in carrying on a business for the purpose of gaining or producing such income' are deductible. Mr Payne relied only on the first limb of the provision. The scope of each of the two limbs is not clear, although there is clearly considerable overlap. (16) As the second limb was not raised by the taxpayer or addressed in any of the decisions, it will not be discussed here. (17)
The first limb of s 51(1) requires the identification of a `loss or outgoing', an understanding of `the assessable income' and identification of a connection between the two. (18) It has been firmly established previously, and is confirmed in Payne, that `the assessable income' does not refer only to assessable income of the same income year as the expense; and the fact that there may be no assessable income as a result of the relevant activity does not preclude deduction. (19) It is generally acknowledged that the phrase `the assessable income' is to be read broadly. However, its extent -- and whether a global or activity-specific approach is to be taken to it -- is an issue raised by the Payne decision. I return to this below in my analysis in Part V.
The key element in s 51(1) is the requisite connection or nexus between the outgoing and the assessable income. The established principles of interpretation concerning the meaning of a loss or outgoing incurred `in gaining or producing' the assessable income are that the outgoing must be incurred `in the course of' gaining or producing income. (20) This has been expressed as requiring that the expenditures be `incidental and relevant' to the gaining or producing of assessable income. (21) As stated by the High Court in its unanimous judgment in Ronpibon Tin: `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.' (22) These established general principles apply to every question of deductibility of an expense under s 51(1).
The leading authority on the question of deductibility of travel expenses is Lunney. (23) The High Court decided by majority (Dixon CJ, Williams, Kitto and Taylor JJ) in Lunney that, in the words of Dixon CJ, `the fares paid by ordinary people to enable them to go day by day to their regular place of employment or business and back to their homes' are not deductible under s 51(1). (24) Dixon CJ came to this conclusion based on the `persuasive authority' rather than the `imperative character' of prior decisions, and on a view that the law `was settled by old authority long accepted and always acted upon'. (25) Williams, Kitto and Taylor JJ, in a joint judgment, held:
Expenditure of this character is not by any process of reasoning a business expense; indeed, it possesses no attribute whatever capable of giving it the colour of a business expense.... [A]t the most, it may be said to be a necessary consequence of living in one place and working in another. And even if it were possible -- and we think it is not -- to say that its essential purpose is to enable a taxpayer to derive his assessable income there would still be no warrant for saying, in the language of s 51, that it was `incurred in gaining or producing the assessable income' or `necessarily incurred in carrying on a business for the purpose of gaining or producing such income'. (26)
The following observations in this joint judgment have been cited ever since as defining the boundary between a `prior' expense, such as the costs of travel to work, and an expense `in' gaining or producing assessable income through work:
[T]o say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself ... (27)
At the other end of the scale regarding travel expenses is the High Court decision in Federal Commissioner of Taxation v Finn. (28) Mr Finn was a senior architect employed by the government of South Australia. He travelled abroad for eight months and devoted the travel to the study of architecture overseas. The High Court allowed the deduction as sufficiently incidental and relevant to the taxpayer's employment and as deductible because it was incurred on travel essentially for educational purposes, directed to the `acquisition of better knowledge of a skilled profession'. (29)
There are many fact situations on the spectrum between Lunney (a `mere' commute) and Finn (travel to gain knowledge and skill directly related to a person's employment or business). In particular situations, travel expenses from one workplace to another, or from home to work, may be deductible -- for example, if a taxpayer is an itinerant worker such as a travelling salesperson; carries large or heavy equipment to and from each location; or is on call and effectively `working' 24 hours a day. (30) These situations will not be addressed here.
The fact situation in Payne raises the question as to whether travel between two places of work or business, as opposed to travel between home and a place of work or business, is deductible. Only one High Court case may be said to have addressed this question. In Federal Commissioner of Taxation v Green, (31) the taxpayer derived income from a number of different activities including director's fees in relation to seven companies, rents from five properties, dividends and interest. The taxpayer was based in Brisbane and claimed a deduction for part of the travel costs for travel to Townsville and Cairns to inspect, supervise and generally look after his rental properties there; the evidence was that this travel was undertaken annually. The High Court, in a very brief judgment by Latham CJ, upheld the judgment of Philp J in the Supreme Court of Queensland that this expenditure was deductible:
[H]is Honour held that it was reasonably necessary to inspect and supervise from time to time the properties from which rents were derived. The evidence supported these findings. The expenditure, a deduction of which is claimed, was incurred in relation to the management of the income-producing enterprises of the taxpayer. If this is so it is immaterial that there might be a difficulty in holding that the taxpayer was carrying on in a continuous manner an identifiable business of some particular description. (32)
The High Court apparently allowed the deduction under the first limb of s 51(1), as it went on to observe that s 51(1) is not limited to deductions against income derived as being the proceeds of a business, but is a general provision `relating to deductions claimable in relation to expenses, losses or outgoings incurred in gaining or producing any income whatever and not merely in relation to income derived from a business.' (33)
Two other Australian cases address travel between places of work or business, both of which have factual similarities with Payne. In Garrett v Federal Commissioner of Taxation, (34) the taxpayer was a medical practitioner who was also a farmer and grazier on a rural property in New South Wales, where he lived. He practised and treated patients in his home town and in Sydney and in other country towns. The taxpayer travelled, both for farming purposes and for the purposes of his medical practice, between the property and the various locations at which he practised medicine by private aircraft. Lusher J in the New South Wales Supreme Court accepted that travel by private aircraft was necessary for him to meet the flexible schedule and demand for his services in the various locations and held that the travel expenditure of $23 300 was deductible, stating:
I find as a fact that the expenditure was incurred in travel between the different places [of] business for the purpose of gaining and producing income, further that the expenditure was `outgoings' incurred in gaining and producing his assessable income. The essential character of the expenditure was that it was a part of the operations by which he earned his income, and was essential to the performance of them, there being no other practical or reasonable way of transporting himself and his vaccines. (35)
In the case of Re the Income Tax Acts, (36) the taxpayer was a grazier who lived on property X in rural Victoria which he owned and managed. He also owned two other Victorian properties on which he carried on dairying activities, and he was a director on the boards of various companies based in Melbourne, from which he derived fees. He had an office at X at which he conducted management and clerical work for the businesses. The taxpayer sought to claim a deduction for his expenses for travel from X to the other rural properties and from X to Melbourne against the income of the director's fees. The Victorian Supreme Court (Holroyd, A'Beckett and Hodges JJ) upheld the deduction of all the travel expenses. All agreed that the taxpayer's travel between X and the other rural properties was necessary and expended solely for the purpose of carrying on the trade of the taxpayer in each place, hence deductible. (37) With respect to the travel from X to Melbourne, Holroyd J held that the fees were part of the income of the taxpayer and the travel costs were `expended for the purpose of enabling him to earn his income' and hence were deductible. (38) A'Beckett J appeared to conclude that the expenditure on travel to Melbourne was deductible because it was between two places of business at which the taxpayer produced income. This applied even though he also lived at X. (39) Hodges J expressed doubt as to the deductibility of the expenses incurred in the travel to Melbourne against the director's fees, based on `a feeling and a view that it is rather getting from his residence to the income-earning place', (40) but went with his fellow judges on the matter.
Mr Payne relied in particular on the cases of Green and Garrett in his argument.
B The Commissioner's Rulings
In spite of the above cases, at the time of Payne there was still some uncertainty as to the application of the law in respect of expenses on travel from one full-time place of income derivation (whether of employment or business) to another, whether or not these places of income production were related or connected in some way. The uncertainty is reflected in the Commissioner's publicly stated views in various tax rulings. Income Tax Ruling IT 2199, issued on 27 September 1985, refers to Garrett and states:
4 Claims for income tax deduction for expenses incurred in travelling directly between two places of employment, two places of business or a place of employment and a place of business should be allowed where the taxpayer does not live at either of the places and the travel has been undertaken for the purpose of enabling the taxpayer to engage in income producing activities.
5 Difficulty may arise where a taxpayer lives at one of the places of employment or business ... It is not practicable to lay down a rule which is capable of application in all cases....
9 ... [S]ituations may arise where a taxpayer has full-time employment or carries on a business away from his home and also conducts a part-time income producing activity from his home which he attends to in the evenings or at weekends or, perhaps, at various times during the year. A number of cases of this nature have come before Taxation Boards of Review and the Boards have denied deduction for the cost of travel between the taxpayer's home and his place of full-time employment or business on the basis that travel is more in the nature of travel between home and place of employment or business than travel between two places of employment or business.
Taxation Ruling TR 95/19, issued 16 June 1995, relates to deductions allowable for airline employees. It is expressed to apply to years commencing both before and after its date of issue (paragraph 9). Paragraph 23 states:
Travel between home and work: Generally, a deduction is not allowable for the cost of travel between home and the normal work place as it is considered to be a private expense.... Travel between two separate work places if there are two separate employers involved: A deduction is allowable for the cost of travelling directly between two places of employment ... Travel between two places of employment or between a place of employment and a place of business: A deduction is allowable for the cost of travel directly between two places of employment or a place of employment and a place of business, provided that the travel is undertaken for the purpose of carrying out income-earning activities.
The rulings do not make absolutely clear the appropriate tax treatment for travel between two unrelated full-time places of employment or business, especially if the taxpayer lives at one place, but both suggest it may be deductible.
The issue of whether Mr Payne was entitled to rely on the Commissioner's statements in these rulings was considered in Payne. A taxpayer cannot rely on an old system public Income Tax Ruling such as IT 2199 if it is found to be wrong in law. However, new system Taxation Rulings such as TR 95/19 are binding on the Commissioner even if the law would produce a different result (41) and so may be relied upon by a taxpayer in a case such as Payne. At the Tribunal level, penalty tax imposed by the Commissioner in respect of the alleged failure of Mr Payne to take reasonable care in complying with the tax law was remitted in full on the grounds that the tax rulings were ambiguous and that Mr Payne had honestly relied on the rulings to claim the deductions. (42)
In the High Court, Mr Payne sought leave to give a notice of contention that the decision of the Full Federal Court should be affirmed on a ground not relied on by the Full Court, namely, that Mr Payne was entitled to a deduction in reliance on TR 95/19. The majority of the High Court found that, at the Tribunal, Mr Payne maintained that he acted in accordance with IT 2199, but little if any argument was directed to TR 95/19. (43) While no mention of TR 95/19 was made in the Federal Court documents, it was clearly referred to in the course of argument of the appeal to that Court. (44)
The majority in the High Court granted Mr Payne leave to argue that the decision of the Full Court should be affirmed on the ground that Mr Payne was entitled to the deduction in reliance upon TR 95/19. (45) They remitted the matter to the Tribunal for the consideration of two questions: first, whether Mr Payne should have leave in respect of any year of income to object to the Commissioner's assessments on the ground that the Commissioner was bound by TR 95/19 to assess the tax payable in accordance with that ruling; and, second, if leave was granted, whether and to what extent the Commissioner was bound. The case has been listed for hearing in the Tribunal on 18 October 2001. (46)
IV THE DECISIONS IN PAYNE
A The Administrative Appeals Tribunal
Mr Payne first applied for review of the Commissioner's decision to disallow Mr Payne's objections in the Administrative Appeals Tribunal. The Tribunal, presided over by J Block, Senior Member, found for the Commissioner. The Tribunal broke the issue of deductibility of the travelling expenses into two questions. First, are expenses incurred in travel between two places of unrelated income derivation incurred `in gaining or producing assessable income'? Second, if yes, what, if any, bearing does the existence of the taxpayer's residence at one of those places have on the matter? (47)
The Tribunal adopted the words of Kitto, Williams and Taylor JJ in Lunney that what is incidental and relevant is determined by reference to the `essential character of the expenditure', (48) and `generally to its connexion with the operations which more directly gain or produce the assessable income.' (49) Thus, an outgoing will not be deductible merely because, in a causal sense, it results in or leads to assessable income or is a prerequisite to earning income. The operations carried on by the taxpayer which more directly gain or produce assessable income must be identified and analysed in order to determine where the expense lies in the context of those operations. (50)
The Tribunal held that expenses incurred in travel between two unrelated places of income derivation are not incurred `in gaining or producing assessable income' (51) and so it therefore did not need to consider the second question regarding the relevance of the taxpayer's residence at one of those places. (52) It distinguished expenses for travel between unrelated places of deriving income from expenses for travel between places of business or work where there is a relationship or connection between them, and thus distinguished Green on the basis that the travel itself was part of the income-earning operation of managing properties from a base in Brisbane. (53) The Tribunal distinguished Garrett on the same basis and suggested that the reasoning in Re the Income Tax Acts had been rejected by the High Court in Lunney. The Tribunal found that Mr Payne's travel between the deer farm and his airport base did no more than put him in a position to carry on two separate and unrelated income-producing operations, so his case fell within the principle enunciated in Lunney. (54) The travel must be a part of the very operation by which income is earned or, put another way, the occupation must by its very nature require travel. (55)
B The Federal Court
Mr Payne appealed to the Federal Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) on the basis that the Tribunal erred in law in failing to determine that he was entitled to deductions under s 51(1). (56)
1 Foster J
Foster J found that the Tribunal had made an error in law and remitted the matter for reconsideration. (57) He disagreed with the Tribunal that Lunney served, in itself, as a basis for determining the deductibility of travel expenses between two places of work or business, finding that Lunney stands for the simple proposition that travel from home to a place of work is not deductible. (58) Foster J said that the Tribunal's attempt to produce a set of principles covering the whole field of deductibility of travel expenses between two places of income production is dangerous and ignores the fact that the law develops on a case by case basis. (59)
Foster J concluded that it is the position of the travelling expenses in relation to the whole of the earning of the assessable income which must be considered. (60) Deductibility depends upon the extent to which the expenses were incurred in gaining or producing the `composite income'. (61) After a somewhat strained analysis of a possible interrelationship between the farm and the work as a pilot, Foster J found that the Tribunal`s failure to take account of the relationship of the travel expenses to the totality of Mr Payne's earnings and his overall earning pattern demonstrated an error of law. (62)
2 The Full Federal Court
The Commissioner appealed to the Full Court of the Federal Court. (63) Sackville and Hely JJ found that the Tribunal had made an error of law, (64) although on somewhat different reasoning from Foster J, and they remitted the matter to the Tribunal for reconsideration in accordance with the law. (65) Hill J dissented.
Sackville and Hely JJ accepted that the travel expenditure of Mr Payne was not incurred in the course of either income-earning activity. It was incurred before or after the duties of each income-earning activity had been performed. (66) However, they said that the term `assessable income' is not confined to income from one particular business, but means the assessable income which the relevant outgoing would be expected to produce: (67)
The critical question involves an examination of the scope of the operations undertaken by the taxpayer ... and the relevance of the expenditure to those operations. The expenditure must be incidental and relevant to the derivation of assessable income from those operations and, in addition, its essential character must be that of a business expense. The relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income. (68)
They said that a taxpayer travelling from one place of business or employment to another place of business or employment in order to conduct activities which will produce assessable income is travelling on work, not travelling to work. (69) They concluded that:
Where travel is between places from which income is derived, for the purpose of deriving income from activities conducted at those sources, there is the contemporaneity between expenditure and income earning activity which is implicit in the notion of `in the course of' gaining or producing assessable income. Moreover, the expenditure has a substantial business character. If the purpose of the travel is exclusively to go from one income producing activity to another, it is difficult to see how the essential character of the expenditure is other than a business or working expense. (70)
It is irrelevant that the work is for different employers, or involves one or more businesses, or spans different occupations. The `essential character' of the expenditure does not change just because the taxpayer travels between two places of unrelated earning activity, and a close organisational connection between the two income-earning activities need not be established. (71)
Sackville and Hely JJ said that, contrary to the Tribunal's reasoning, Lunney does not support the proposition that travel expenses between two places of income derivation are not `incurred in gaining or producing assessable income' if the most that can be said of them is that they are precursory to the activities conducted at both places. (72) They found that, although Green and Garrett involved travel expenses incurred in travel between related places of business, the courts in those cases did not see that as significant to the outcome. (73) In light of this, Sackville and Hely JJ said that expenses incurred in travel between two unrelated places of business or employment can be deducted under s 51(1). (74) The Tribunal had therefore erred in concluding that the travel expenses were not deductible on this basis. (75)
Sackville and Hely JJ remitted the matter to the Tribunal for determination on the basis that the expenses of travel between a place of business and another place of employment are capable of constituting allowable deductions under s 51(1). (76) This still left to be determined the question of the relevance of Mr Payne residing at the farm. The Tribunal would need to determine whether the travel expenses in this case were incurred in the course of gaining or producing the assessable income, especially because the taxpayer resides at one of the places of business. (77) Whether the expenses are deductible, then, may depend on the predominant character of the farm -- whether it is a place of business or home -- and the purpose of the journey in question. (78) They also said that the negative limb of s 51(1) disallowing expenses of a `private or domestic' nature needs to be addressed. (79)
3 The Dissent of Hill J
Hill J stated that the law on deductibility of travel expenses had stood for a long time and any change to it was a matter for the High Court or the legislature. (80) He summarised the case law as establishing the following: (81)
1 Travel from home to work is not deductible; it is a condition precedent to work.
2 Travel from work to home is not deductible; it is subsequent to work.
3 Travel on work from one place of employment to another in the same job, or from one place of business to another for the purpose of one business, is deductible.
Hill J said it followed from these propositions that travel from the end of one job to another separate job is not deductible regardless of whether the taxpayer has two separate jobs, two unrelated businesses or one business and one place of employment as an employee. (82)
Hill J said that, for an outgoing to be deductible, there must be a relationship or connection with some assessable income or the activity which more directly generates assessable income. (83) Where the expenditure has no connection with either income-producing activity and is not a working expense of either activity, it is not `incurred in the course of gaining or producing assessable income'. (84) Hill J believed this to be such a case. The expenditure was merely a condition precedent to Mr Payne earning income as a pilot, and the case law dictates that this is not sufficient to make the expenditure deductible. (85)
C The High Court
The Commissioner appealed to the High Court. (86) The majority (Gleeson CJ, Kirby and Hayne JJ) found that the sums claimed by Mr Payne were not deductible and that the Tribunal had not made an error of law. Gaudron and Gummow JJ dissented, agreeing with the reasoning and orders of the Federal Court majority.
1 The Majority Decision
Gleeson CJ, Kirby and Hayne JJ delivered the majority judgment in the High Court. They said first that s 51(1) requires the identification of a loss or outgoing, an understanding of `the assessable income' and the identification of a connection between the assessable income and the expense. (87) They said that:
Accepting, as one must that `the assessable income' referred to in s 51(1) is a broad concept, it may well follow, as the majority of the Full Court said, that `[t]he relevance of the expenditure should be determined having regard to the overall income producing activities of the taxpayer, and not by reference to individual sources of income'. That is not to say, however, that the kind of connection that s 51(1) requires between outgoing and income is other than the connection described as `incurred in gaining or producing the assessable income'. The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive of actual or expected income? (88)
The majority cited Lunney as settled authority for the principle that expenses incurred in travelling between a taxpayer's place of residence and a place where income is derived are not deductible. (89) They referred to the joint judgment in Lunney that an expenditure which is a mere `prerequisite' to the earning of a taxpayer's income is not incurred in or in the course of gaining or producing his or her income:
That is, the majority in Lunney held that a taxpayer does not demonstrate that the first limb of s 51(1) is satisfied by demonstrating only that there is some causal connection between the expenditure and derivation of the income. What must be shown is a closer and more immediate connection. (90)
The majority then applied this interpretation of Lunney to the present case and concluded that `[w]hen, as here, the travel is between two places of unrelated income derivation, the expense cannot be said to be incurred "in the course of" deriving income from either activity'. (91) It was accepted by the majority of the Federal Court that Mr Payne's travel occurred before he began to perform his duties as a pilot, or after he had fulfilled those duties; similarly with respect to the deer farming business. Consequently, the High Court found that the travel of Mr Payne
occurred in the intervals between his two income-producing activities. The travel did not occur while the taxpayer was engaged in either activity. To adopt and adapt the language used in Ronpibon, neither the taxpayer's employment as a pilot nor the conduct of his business farming deer occasioned the outgoings for travel expenses. These outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived. In this respect they were no different from expenses incurred in travelling from home to work. (92)
The majority failed to discuss any of the other jurisprudence on deductibility of travelling expenses, including the High Court decision in Green and the cases Garrett and Re the Income Tax Acts. They referred to the `misgivings' of Dixon CJ in Lunney but stated that, if there is to be any criticism of the connection required between the expense and the activity which derives assessable income, that criticism should be directed to the legislation and not to the way the legislation has been interpreted -- `the distinction has long been made and it is now too late for the Court to "rip it up" and treat the section as allowing any and all deductions having some causal connection with the derivation of assessable income.' (93)
2 The Dissent
Gaudron and Gummow JJ, in dissent, agreed with the reasoning and orders made by the majority of the Full Court of the Federal Court. (94) They emphasised the difficulty of applying s 51(1) to an `infinite variety of factual situations'. (95) They observed that:
The temptation, or at least the tendency, to which this difficulty gives rise is the derivation of a `principle' from similar facts in various cases. The `principle' then is taken to govern the administration of the statute with respect to later cases said to fall within this artificially constructed category. (96)
Gaudron and Gummow JJ quoted Professor Ross Parsons' observation that `all the decisions are concerned with fixing the point where connection with a process of income derivation is sufficient to make an outgoing relevant.' (97) They were concerned to emphasise that: `A decision fixing that point in a given case will involve considerations of some indeterminacy, with leeway for judicial choice indicated by the subject-matter, scope and apparent purpose of s 51 (1).' (98)
The preposition `in' linking outgoings and assessable income in s 51(1) requires the finding of a sufficient connection. Gaudron and Gummow JJ said that the analysis of Williams, Kitto and Taylor JJ in Lunney in determining this connection presented `as logically inevitable an outcome which may not necessarily be dictated by the terms of the statute.' (99) They accepted Lunney as determining that expenses which are no more than the costs of the movement of the taxpayer between a sole place of work and the place of residence are insufficiently connected with income derivation to be deductible under the first limb of s 51(1). (100) However, they would confine Lunney to that result, finding it to be `not determinative' of the question of sufficiency of connection with respect to expenses of movement between two or more places of work or business activity. (101) It is worth citing their conclusion in full:
The Commissioner supports the division into two parts of the field upon which the governing legal principles are to be put in play. The classification then predetermines the outcome. The first field is identified as `travel on work' and the second as `travel to work'. All then turns upon the reach of these propositions when applied to the facts. An expense in respect of the first category may have a sufficient connection with income derivation; an expense in respect of the second cannot be sufficiently connected with income derivation. The criteria by which the facts are evaluated so as to assign the taxpayer's activities to one category rather than the other are assumed rather than articulated. The search for an `essential', in the sense of exclusive, character does not sit well with the statutory text. The text presupposes that losses and outgoings to some extent only may be incurred in the course of gaining or producing the assessable income, yet be sufficiently connected with them. (102)
Gaudron and Gummow JJ adopted the words of Sackville and Hely JJ in the Federal Court that travel between two places of income derivation has sufficient contemporaneity and business character to be an expense `in the course of' gaining or producing assessable income. (103) As this analysis would require a detailed consideration of facts and evidence, including evidence on matters that the Tribunal had not considered, such as the relevance of Mr Payne living at the deer farm, the matter had to be dealt with at the Tribunal level. (104) Gaudron and Gummow JJ would have dismissed the appeal and remitted the matter to the Tribunal for reconsideration according to law.
V OBSERVATIONS ON LAW AND POLICY
The Payne case has affirmed that commuting costs between home and work, as decided in Lunney, are not deductible because they are a `prerequisite' to earning the income. More significantly, the High Court has for the first time determined that expenditure on travel between two unrelated places of income derivation or income-producing activity is not deductible as it is a `prerequisite' to each income-earning activity. This result is independent of whether or not the taxpayer resides at either place. Deductibility of travel expenses between two related places of income-producing activity was not discussed at all in the High Court majority decision. While Green and Garrett suggest that at least this expenditure would be deductible, is such travel `in the course of' the income-producing activity? Presumably it is, but it is possible that Payne puts even this in doubt.
In this part I consider Payne in light of the history and structure of the tax law. I argue that, were `logic' to prevail, the dissent in the High Court and the majority in the Full Federal Court would be the better approach. I then consider the relevance of the fact that Mr Payne was travelling to and from his home -- that is, the importance of the `living' or `private' nature of the expense.
A A Question of Tax Law Interpretation: The Relevance of Income-Producing Activities to Deductibility
The ghost of Professor Ross Parsons is felt -- benevolently, one presumes -- in most interpretations of s 51(1). His text of 1985, of which there was only one edition, remains the most comprehensive treatise on principles of income, deductibility and tax accounting in Australia. (105) The careful words of Professor Parsons had a very significant effect on the framing of the taxpayer's case in Payne and appear in all judgments except for that of the High Court majority -- which ultimately decided the case. In particular, the notions of `contemporaneity' and `relevance', and to a lesser extent `working expense', were used by the lower courts and in the High Court dissenting judgment. (106)
Professor Parsons' analysis of s 51(1) is summarised in his own words as follows:
(i) A non-contemporaneous expense is not deductible under s 51 (1) whatever its nature.
(ii) A contemporaneous expense is deductible if it is a working expense, and relates to assessable income.... No other contemporaneous expense is deductible under s 51 (1).
(iii) An expense that is relevant to income derivation will be a working expense if it relates to the process by which income is derived. It will not be a working expense, and may be described as a capital expense, if it relates to the structure of the activity that produces income, or to the property whence income is derived.
(iv) An expense that is not relevant to income derivation will not be a working expense, and may be described as a private or domestic expense. (107)
In respect of travel expenses, Professor Parsons observes that the cost of travel to and from a place of work `could hardly be seen as other than working', but may not be sufficiently relevant as it may be a private or living expense. (108) He concludes that Lunney does not answer the question of the relevance of travel expenses between two places of work and suggests that, even where places of work or business are unrelated (as in Payne), travel expenses between these places `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.' (109) The notions of contemporaneity and relevance were adopted by Professor Parsons in an attempt to cut through the various terms and analogies applied in the many cases on deductibility of expenses in s 51(1), and to avoid debates about the `purpose' of an expense, which raised questions of subjective or objective intent. In his analysis of Lunney, these concerns about the use of language are made clear:
The analysis [of `essential prerequisite' in Lunney and in Lodge v Federal Commissioner of Taxation (110)] 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. (111)
The majority High Court judgment in Payne applied the logic of Lunney to rule conclusively that expenditure on travel between two places of unrelated income derivation cannot be deductible as it is not incurred `in the course of' gaining or producing assessable income `in either activity'. (112) The travel did not occur when the taxpayer `was engaged in either activity' and so did not have more than a causal connection with the derivation of the income. (113) Deductibility requires a `closer and more immediate connection' (114) between the expenditure and the income-producing activity. Expenditure must be incurred `in the course of' the activity itself, not merely `for the purpose' of deriving assessable income -- to say otherwise, according to the majority of the High Court, is to go against the words of the legislation. (115)
Yet is this narrow approach required by the well-established interpretation of `in' as meaning `in the course of' gaining or producing assessable income? Section 51(1) does not refer to `an income-producing activity'. It refers, rather, to losses or outgoings incurred `in gaining or producing the assessable income'. As discussed above, all judges agreed that `the assessable income' in the deduction rule must be read broadly. (116) The dissent in the High Court and the Federal Court majority came to the opposite conclusion to the High Court majority on the words of s 51(1). They found that it would `distort the language of the statute' to ask the question, `what business is the taxpayer engaged on when travelling between Tamworth and Sydney?' (117) That is, it is not the right question under s 51(1) to ask whether the expense is incurred `in' either of the `income-producing activities' of the taxpayer.
The High Court majority appears to read into s 51(1) a required nexus of expenditure with a particular income-producing activity or business for deductibility which is not warranted by the words of the statute. The cases of Green and Garrett would have to be read narrowly to fit within this interpretation. Such a reading is possible on the facts of both cases. It is possible to read Green as allowing a deduction for travel in respect of related income-producing activities where Mr Green's base was in Brisbane -- although the High Court expressly stated in that case that it was not necessary that Green be engaged in a single income-producing business for deductibility. It is possible to read Garrett, in any event only a single judge decision of the NSW Supreme Court, as allowing a deduction for travel in a single income-earning activity, that of medical practitioner, or as allowing the deduction for travel involving carrying refrigerated vaccines and other important tools of Garrett's medical practice.
Gaudron and Gummow JJ warned against the creation of artificial categories or fixed principles in the application of s 51(1). (118) The approach of the majority in Payne has been to establish fixed boundaries around different work or business activities and to reify a concept of an `interval' between such `unrelated' activities. In the case of the travel expenses of Mr Payne, the `interval' is physical and expressed by distance -- it is the space and time in which he is in a car, plane or train en route from one workplace (the deer farm) to another (the Mascot pilot base). Yet a person on a train travelling between `related' activities or businesses is no less in such an `interval' than one travelling between `unrelated' activities. As explained by the dissenting judges, `while travelling north on the long haul from Brisbane', the taxpayer in Green `was not managing, inspecting or supervising the properties, and was not "travelling on work".' (119) A person travelling for education or skill-related work, such as Finn the architect, (120) was not doing such work while on the plane to South America -- at least, not in any more relevant way than Mr Payne, who worked on matters to do with his deer farm while overseas with Qantas, and en route to Mascot. It is the nature of travel costs to be associated with `intervals'.
The majority of the Full Federal Court sought to address the meaning of `the assessable income' directly, in an approach approved by the High Court dissent. (121) They said that s 51(1) required an examination of the `scope of the operations undertaken by the taxpayer'. (122) Even in the case of `unrelated' employment or activities, where a taxpayer is travelling from one place of business or employment at which she or he derives assessable income to another, `[t]he taxpayer's work requires his or her attendance at each place. It does not matter that "the work" is for different employers, or involves one or more businesses, or spans different occupations.' (123) The Federal Court majority concluded that `[t]he relevance of the expenditure should be determined having regard to the overall income-producing activities of the taxpayer, and not by reference to individual sources of income.' (124)
B A Global or Schedular Income Tax?
The segregation by the High Court majority in Payne of the taxpayer's income production into separate activities for the purpose of s 51(1) implies a schedular approach to the determination of taxable income. At least on its face, the Income Tax Assessment Act 1936 (Cth) established a `global' income tax system rather than a `schedular' one (such as the system that has existed for a long time in the United Kingdom). The global definition of `assessable income' in s 25(1) of the Income Tax Assessment Act 1936 (Cth) (now replaced with s 6-5 of the Income Tax Assessment Act 1997 (Cth)), includes `gross income derived directly or indirectly from all sources'.
The segregation of income-producing sources or activities by the High Court majority seems out of step with the `real' postmodern world of work and business. Joel Butler cites evidence that `income earning is becoming fragmented and multiply sourced, and that for more workers, work is not situated in one or even a few geographically fixed places.' (125) Changing patterns of work and business include an increase in the number of wage and salary earners with multiple jobs and presumably an increase in the numbers of those with multiple income sources. There is also an increase in the number of people earning their income, or part of it, at home. Butler suggests that the approach of the Federal Court majority is more in line with patterns of modern work as involving the necessity of deriving income rather than the requirements of having `a job'. (126)
There is also a structural argument that supports a broad view of income and deductions as more appropriate for our `global' income tax statute. As indicated above, the Income Tax Assessment Act 1936 (Cth) was established, like most of its Australian (State and Commonwealth) predecessors, as a global income tax. Gross income from whatever source is summed as `assessable income' and allowable deductions, incurred in gaining or producing the assessable income, are offset against that sum to produce taxable income. This is taxed to the individual taxpayer at his or her applicable marginal tax rate. In contrast, a schedular income tax defines particular classes or `schedules' of income against which related expenses may be deducted. The expenses are thus quarantined to particular income sources. Different tax rates may apply to different schedules, and other variations in calculation of taxable income from each schedule -- for example, different tax accounting mechanisms -- may apply. As stated by Burns and Krever:
In the benchmark schedular system, gross income and deductible expenses are determined separately for each type of income.... In the benchmark global system, there is no matching of particular types of income to the expenses incurred to derive the income. All income and expense are considered together to arrive at a single net gain that is subject to tax. Thus, under a pure global system, the category of income is irrelevant. (127)
The first income tax Act in Australia, the Taxation Act 1884 (SA), contained the seeds ors 51(1) of the Income Tax Assessment Act 1936 (Cth). (128) The South Australian Act imposed tax on the `taxable amount' determined by deducting from the gross income of the taxpayer `all losses, outgoings and expenses, actually incurred by the taxpayer in the production of the income'. (129) The Land and Income Tax Assessment Act 1895 (NSW) was expressed in similar terms. (130) In contrast, the Income Tax Act 1895 (Vic) had a schedular system under which deductions were allocated to a particular schedule or category of income; for example, s 9(2) of the Income Tax Act 1895 (Vic) allowed deductions for expenses `wholly and exclusively laid out or expended for the purpose of ... trade'.
The global approach of the Income Tax Assessment Act 1936 (Cth) also contrasts with the United Kingdom income tax statute, (131) which has for most of its history been schedular rather than global in nature. The UK definition of income is based on a number of schedules, sometimes subdivided into cases; to be taxable, a particular item must fall into one of the schedules. Some schedules are very broad, including profits from a trade, which include employment income; others are narrow. The rules of each category must be applied separately; each schedule is viewed as a separate source. (132) UK lawyers saw the difference between the schedular UK tax system and the new global Australian tax system early on, as David Russell has observed. (133) The Privy Council said in Commissioners of Taxation v Antill, concerning the Land and Income Tax Assessment Act 1895 (NSW):
Instead of collecting income tax by separate returns under different schedules of charge, as is the case under the income tax code in force in this country, the Act of 1895 ... requires inclusive returns of all income arising from any kind of property in the State ... The Act of 1895 differs so much, both in its general scheme and in its language, from the income tax code in force in the United Kingdom that it is difficult to see how decisions in cases under Schedule D, which imposes the tax on trade and professional incomes in this country, can be any guide to the construction of the [1895 Act]. (134)
This early observation of the structural difference between the UK and Australian tax laws did not prevent the continued citation of UK cases with respect to various aspects of Australian income tax. (135) A further key difference was added in s 51(1) of the Income Tax Assessment Act 1936 (Cth), in its abandonment of a requirement that expenditure be `wholly or exclusively' in respect of a trade or profession and its addition of a requirement that expenditure would be deductible `to the extent' incurred `in' gaining or producing assessable income.
A number of UK cases limiting the ability to deduct costs for travel between home and work were cited as established authority in Lunney. (136) One of the most important cases referred to was Newsom v Robertson (Inspector of Taxes). (137) In Payne, the Tribunal also relied on Lord Wilberforce's judgment in Taylor v Provan (Inspector of Taxes) (138) as authority for the proposition that the expenses of travel between two places of unrelated business will in most cases be non-deductible. (139) Newsom highlights the differences between the UK tax law and s 51(1). The question was whether railway fares paid by a professional man in respect of journeys between his home and chambers were `money wholly and exclusively laid out or expended for the purposes of his profession'. (140) The Court of Appeal disallowed the deduction. (141) Denning LJ said that the expenses for travelling from home to work were not incurred `wholly and exclusively for the purposes of the trade' but were `living expenses' incurred for the purpose of his living away from work and not for the profession -- `or at any rate not wholly or exclusively'. (142)
As was intimated by Dixon CJ in Lunney, (143) and has been suggested by Parsons and other commentators, (144) the approach in Newsom in characterising commuting expenses from home to work exclusively as `personal or living expenses' did not have to be applied in Australia. (145) Nonetheless, that principle is now established. However, this does not mean that the schedular approach in Newsom should apply in a situation involving travel from one place of work or business to another under Australian tax law. Travel expenses between business and director activities were allowed as a deduction even under the schedular Victorian tax laws considered in Re the Income Tax Acts, discussed above. If one is to look at `assessable income' as a whole, and taking into account that we do not require an exclusive purpose of expenditure in a particular business or profession, as did the relevant UK statute, the schedular approach in Newsom is arguably not applicable at all. (146) If Australia has a global income tax, the Federal Court majority approach to allow travel expense deductions with respect to the whole income seems appropriate.
Having said this, it is perhaps not as clear now as it was in 1895 that Australia has a global rather than a schedular income tax. In spite of the `global' expression of the income and deduction provisions, the Australian judicial notion of income has been relatively narrowly interpreted, using a source approach, since the inception of the tax law -- excluding capital gains, income from exertion when a taxpayer is not in a business or an employee, and amounts received as gifts, to name just a few examples. (147) It is not inconsistent with this jurisprudential history that the deduction rule also be read down to take a more `source' or activity-oriented approach.
Furthermore, while various statutory provisions of the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth) have expanded the reach of income to include capital gains and other items, in more recent changes the statute itself appears to be becoming more schedular. The source-based judicial notion of `ordinary income' has now been explicitly acknowledged and established in s 6-5(1) of the Income Tax Assessment Act 1997 (Cth) which includes only `income according to ordinary concepts' in the assessable income of a taxpayer. The tax law takes a schedular approach to capital losses, allowing offset only against capital gains, while deductions for items such as interest expense related to income derived offshore are quarantined to such income. (148) Recently legislated strict substantiation requirements apply to employment-related tax deductions but not to business deductions. (149) Most significantly, the new Division 35 of the Income Tax Assessment Act 1997 (Cth) quarantines losses where deductions for `the amounts attributable to the business activity' (150) exceed income from that activity, deferring the loss to be claimed against income derived from that business activity in a later year, unless certain conditions are met. In the example provided in the statute under s 35-10, Jennifer has a salaried job and also carries on a business activity of selling lingerie. The example states that Jennifer has $10 000 worth of deductions relating to the business activity, which produces only $8000 of income; consequently, she must defer the deduction. (151) The analysis of the High Court majority in Payne fits nicely with the statutory framework in s 35-10. Jennifer would not be entitled to deductions for travel from her salaried job to a lingerie client, as these are two separate and unrelated business or work activities and the travel occurs in the `interval' between those activities.
C Travelling across the Public-Private Boundary
I suggest above that the High Court majority took an unduly narrow `schedular' approach to deduction of travel expenses on the basis of the expense being incurred `in' a particular `income-earning activity'. That is not to say that the result in the case is incorrect. The decision of the High Court majority in Payne, denying the deduction, would have been better based on the view that the expense was private or domestic in nature because Mr Payne lived at the farm.
Payne was argued before both the Federal Court and the High Court as a case solely concerning travel between two unrelated places of work or business. This approach followed from the Tribunal approach which divided the issue of deductibility of Mr Payne's expenses into two questions and, having answered no to the question, `were the expenses deductible as incurred "in gaining or producing" assessable income?', did not reach the second question of the relevance of Mr Payne's residence at the deer farm. The Federal Court majority and the High Court dissent would have required the Tribunal to reconsider the first question according to law and then to consider the second question. In view of the decision in the High Court, there was in the event no need for any consideration of Mr Payne's residence at the deer farm.
In spite of the way that the Payne case was framed for decision and the conclusion of the High Court majority on this basis, I suggest that the drawing of a boundary between `work' and `private' costs is fundamental to the Payne case. The importance of characterising an expense as a `living expense', as distinct from a work or business expense which is incurred `in gaining or producing' assessable income, is obscured by the facts and decision in Payne. To raise the question again, one has only to ask the hypothetical -- what if Mr Payne had his home at neither the deer farm nor at Mascot, but travelled to and between each place to carry on his income-producing operations?
The characterisation of an expense as a `living' or private cost rather than a `work' cost appears in the cases as relevant both to the general definition of expenditure incurred `in gaining or producing assessable income' and also in the application of the negative limb that denies a deduction for expenditure of a `private or domestic' nature. It is not clear to what extent the negative limb of s 51(1), disallowing deductions for `private or domestic' expenditure, was applied by the High Court to disallow the commuting cost in Lunney. Professor Parsons took the view that this negative limb did not have independent operation but applied only in contradistinction to the positive limb; that is, it is simply another way of saying that an expenditure is not deductible because it is not a `relevant' and `working' expense. (152) Whether or not this is correct, the `proper' characterisation of the commuting expense as `a personal or living expense' was fundamental to the decision of Williams, Kitto and Taylor JJ in Lunney. (153)
The distinction between `living' and `work' or `business' expenses inherently depends on a private--public demarcation. (154) The very structure of the income tax requires a demarcation between work-related expenses and `private' (or non-work-related, or consumption) costs. This necessity arises from the definition of the comprehensive or ideal income tax base as including net gain, being the sum of accretions to wealth and consumption, but not including costs of getting to that net sum. Allowing a deduction for personal consumption costs would render the income tax a tax solely on savings, rather than on income. This necessary boundary is one of the most difficult in the tax law. In his 1938 treatise on the comprehensive income tax, Henry Simons wrote:
If difficulties arise in determining what positive items shall be included in calculations of income (in measuring consumption), they are hardly less serious than those involved in determining and defining appropriate deductions. At the outset there appears the necessity of distinguishing between consumption and expense; and here one finds inescapable the unwelcome criterion of intention. A thoroughly precise and objective distinction is inconceivable. Given items will represent business expense in one instance and merely consumption in another, and often the motives will be quite mixed. (155)
Travel expenses between home and work are the classic example of `mixed' expenses which may have both an income-producing and a consumption dimension, in spite of the assertion of Denning LJ in Newsom that their primary quality is as a `living expense'. (156) Taking this approach, and in effect turning around the question in Payne, one should ask, `what is the consumption -- or private -- element in the travelling expenses of Mr Payne?'
The key consumption element, it seems to me, is the fact that Mr Payne, by virtue of his travel between the deer farm and the Mascot pilot base, is also travelling to and from his home. Consequently, in determining the deductibility of Mr Payne's travel expenses, the appropriate question is `are they sufficiently "relevant" and "working" in nature?' Professor Parsons makes this clear in his observation that deductibility must `be dependent on actual work in each place of business on the occasion of travel'. (157) This will require a close analysis of the facts and a consideration of the nature of specific journeys undertaken by Mr Payne. It may also require some commonsense consideration as to Mr Payne's lifestyle. The Tribunal found as a fact that Mr Payne did work in the farming business, or as a pilot, immediately before and after each trip. Mr Payne arranged his time so as to spend approximately four days each week at the farm and three days each week in his pilot employment. Would it be appropriate then to inquire when Mr Payne rested and took leisure? It may or may not be an appropriate use of the apportionment rule in s 51(1) to allow a deduction only for those trips that are truly related to the income-producing activity and not to leisure, or being home on the farm for a weekend. This issue should have been determined by the tribunal of fact in Payne.
D Gatekeepers of Certainty and the Revenue The law as it has been propounded to date may be thought by many to be unsatisfactory and perhaps illogical. However, it has stood for a long time and, if it is now to be reopened, that is a matter for the High Court or legislative intervention. Given the cost to the revenue of, in essence, subsidising the cost of taxpayers travelling to and from work, the lack of legislative action is far from surprising, even if it could be argued that it might well have an impact on employment at low levels of income. (158)
Since Dixon CJ in Lunney, the courts have from time to time expressed concerns about the cost to revenue of allowing tax deductions for commuting expenses. The issue has been, basically, a concern that allowing such a deduction could open the floodgates to deductibility of personal or `consumption' type expenses rather than expenses in work. Cost to revenue and certainty of result in the tax law may well be issues that the courts should bear in mind in considering tax cases. However, is it appropriate that they should determine the outcome? Gaudron and Gummow JJ, in dissent in the High Court, suggested that `practical considerations have intruded' into the analysis of deductibility under s 51(1) -- specifically `an apprehension as to the cost to the Revenue of, in essence, subsidising that expenditure by taxpayers.' (159)
If cost to revenue is a concern for the court, it is laudable that it be explicitly stated as it was by Hill J in the Full Federal Court in Payne. It is notable that the majority High Court decision in Payne does not refer either to the cost to revenue or to issues of certainty, yet it is difficult to avoid the thought that these issues must have occurred to them. Even if cost to revenue is acknowledged as a concern, it is not clear how the approach of the Full Federal Court majority or the High Court dissent in Payne would open the floodgates or put at risk the revenue. To the extent that the High Court majority raises the issue of unwarranted deductions through taxpayers claiming expenses for travel to and from home where this is not really a place of work or business, this should be addressed by the negative limb of s 51(1) -- is the expenditure really `private'? These decisions make clear that the fact that Mr Payne's home was at the deer farm warranted very careful consideration by the Tribunal. It is possible, however, that the High Court dissenting judges would require a more nuanced application of the terms of s 51(1) to the facts of each case, and this may bring about an increase in complexity or uncertainty.
The Payne case raises in pointed fashion one of the most difficult line-drawing problems in the income tax. Given this, and the ambiguity of the Commissioner's rulings on the topic of deductibility of travelling expenses between two unrelated places of work or business, the decision of the High Court to remit the matter for further consideration on whether Mr Payne could rely on the Commissioner's rulings is appropriate. Yet it is disappointing that the Payne decision seems to close down the appropriate application of the tax law to new and developing ways of deriving income in the real world and to drive the Australian income tax toward a schedular rather than global concept of taxable income.
(1) Transcript of Proceedings, Commissioner of Taxation v Payne (High Court of Australia, Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ, 3 August 2000). Gummow J and Gleeson CJ, addressing D H Bloom QC, counsel for the appellant, were referring to the judgment of Dixon CJ in Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478, 486 (`Lunney').
(2) (2001) 177 ALR 270.
(3) Re the Taxpayer and Deputy Commissioner of Taxation (1997) 46 ALD 718 (`Payne (AAT)').
(4) Payne v Federal Commissioner of Taxation (1998) 39 ATR 356 (`Payne (FC)').
(5) Commissioner of Taxation v Payne (1999) 90 FCR 435 (`Payne (FFC)').
(6) See Stephen Barkoczy, `Deductions for Travel between Home and Work' (1999) 2 Journal of Australian Taxation 366; Joel Butler, `Changing Work-Patterns and Deductibility of Travel Expenses: lime for a Change in Approach?'  Weekly Tax Bulletin 398; John Giannakopouls and Michael Siu, `Tax Pack -- More Payne for the ATO' (1999) 70(8) Charter 30; Annamaria Carey, `I Still Call the Deer Farm Home' (2001) 35 Taxation in Australia 437; Annamaria Carey, `Planes, Trains and Automobiles!' (1999) 33 Taxation in Australia 541. For earlier analyses of deductibility of travel expenses, see Ross Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (1985) 408-9; E W Wallace, `The Deductibility of Travel Expenses' (1972) 1 Australian Tax Review 87.
(7) Barkoczy, above n 6, 383.
(8) See text accompanying above n 1.
(10) Payne (AAT) (1997) 46 ALD 718.
(11) The location of the farming property was not disclosed by the Tribunal, but was mentioned by the Federal Court in Payne (FC) (1998) 39 ATR 356, 359 (Foster J); Payne (FFC) (1999) 90 FCR 435, 438 (Sackville and Hely JJ); Payne (2001) 177 ALR 270, 271 (Gleeson CJ, Kirby and Hayne JJ).
(12) The airline and airport were not disclosed by the Tribunal but were mentioned by the Federal Court in Payne (FFC) (1999) 90 FCR 435, 438 (Sackville and Hely JJ) and the High Court in Payne (2001) 177 ALR 270, 278 (Gaudron and Gummow JJ).
(13) Noted by Foster J in the Federal Court in Payne (FC) (1998) 39 ATR 356, 375 and by Gaudron and Gummow JJ in dissent in the High Court in Payne (2001) 177 ALR 270, 278; not by the Tribunal.
(14) The content of s 51(1) is reflected, since the tax law rewrite, in s 8-1 of the Income Tax Assessment Act 1997 (Cth), applicable from the 1998-99 income year. It is intended that s 8-1 carry the same meaning as s 51(1): Explanatory Memorandum, Income Tax Assessment Bill 1996 (Cth) 42. Section 8-1 of the Income Tax Assessment Act 1997 (Cth) reads relevantly:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; ...
(15) Payne (FFC) (1999) 90 FCR 435, 441 (Sackville and Hely JJ); Payne (2001) 177 ALR 270, 272 (Gleeson CJ, Kirby and Hayne JJ).
(16) The second limb `in actual working ... can add but little to the operation of the leading words [of the first limb]': Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47, 56 (`Ronpibon Tin').
(17) The Tribunal in Payne (AAT) (1997) 46 ALD 718, 722-3 found that `[g]iven the expansive meaning attributed to the first limb ... and the consequently restricted independent scope of the second limb', the reliance by Mr Payne only on the first limb was appropriate. However, the dissent of Gaudron and Gummow JJ in Payne (2001) 177 ALR 270, 278 referred to the reliance on only the first limb of the test as affecting the `scope' of their decision but did not explain how it might have affected their view.
(18) Payne (2001) 177 ALR 270, 272 (Gleeson CJ, Kirby and Hayne JJ).
(19) Ibid, citing Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, 16 (`Fletcher'). Section 8-1(1) of the Income Tax Assessment Act 1997 (Cth) does not refer to `the' assessable income but to `your' assessable income, perhaps removing this as an interpretive issue.
(20) Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295, 303 (Latham CJ), 309 (Dixon J); Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344, 350, cited by Sackville and Hely JJ in Payne (FFC) (1999) 90 FCR 435, 441.
(21) W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290, 305 (Dixon J); Ronpibon Tin (1949) 78 CLR 47, 56.
(22) (1949) 78 CLR 47, 57, endorsed in Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459, 467 (Gleeson CJ, Gaudron and Gummow JJ).
(23) (1958) 100 CLR 478.
(24) Ibid 485. Lunney, the first appellant, was a ship`s joiner who paid bus fares to travel from his home in a residential suburb in Sydney to the water's edge for his employment; Hayley, the second appellant, was a dentist who carried on business at a dental practice and commuted to and from the place of business and home.
(25) Ibid 486.
(26) Ibid 501.
(27) Ibid 499.
(28) (1961) 106 CLR 60 (`Finn').
(29) Ibid 68 (Dixon CJ).
(30) See, eg, Commissioner of Taxation v Vogt  1 NSWLR 194; Federal Commissioner of Taxation v Wiener (1978) 78 ATC 4006; Federal Commissioner of Taxation v Collings (1976) 10 ALR 475. These cases are discussed in Barkoczy, above n 6.
(31) (1950) 81 CLR 313 (`Green').
(32) Ibid 319.
(34) (1982) 58 FLR 101 (`Garrett').
(35) Ibid 108.
(36) (1903) 29 VLR 298. The case concerned the application of the then-applicable Victorian income tax law, which had a quite different structure from the Income Tax Assessment Act 1936 (Cth). I return to the different structure of the Victorian tax statute in below Part V(B).
(37) Re the Income Tax Acts (1903) 29 VLR 298, 304 (Holroyd J), 306 (A'Beckett J), 306 (Hodges J).
(38) Ibid 304.
(39) Ibid 306.
(40) Ibid 307.
(41) Income Tax Assessment Act 1936 (Cth) s 170BA(3).
(42) Payne (AAT) (1997) 46 ALD 718, 739-40.
(43) Payne (2001) 177 ALR 270, 276.
(44) Payne (FFC) (1999) 90 FCR 435.
(45) Payne (2001) 177 ALR 270, 276.
(46) Ref No NT 2001/114 (AAT, Sydney).
(47) Payne (AAT) (1997) 46 ALD 718, 728.
(48) Ibid 724, citing Lunney (1958) 100 CLR 478, 499.
(49) Payne (AAT) (1997) 46 ALD 718, 724 (emphasis in original), citing Federal Commissioner of Taxation v Smith (1981) 147 CLR 578, 586 (Gibbs, Stephen, Mason and Wilson JJ).
(50) Payne MAT) (1997) 46 ALD 718, 737-8.
(51) Ibid 738.
(52) Ibid 739.
(53) Ibid 737-8. See also Federal Commissioner of Taxation v Genys (1987) 17 FCR 495 (`Genys'); Green (1950) 81 CLR 313.
(54) Payne (AAT) (1997) 46 ALD 718, 738.
(56) Payne (FC) (1998) 39 ATR 356.
(57) Ibid 375.
(58) Ibid 372.
(59) Ibid 375.
(63) Payne (FFC) (1999) 90 FCR 435.
(64) Ibid 447.
(65) Ibid 451.
(66) Ibid 445.
(69) Ibid 446.
(70) Ibid 446-7.
(71) Ibid, contrary to the view of Foster J.
(72) Ibid 448.
(73) Ibid 450.
(76) Ibid 451.
(80) Ibid 436.
(82) Ibid 437.
(83) Ibid 436.
(86) Payne (2001) 177 ALR 270.
(87) Ibid 272.
(88) Ibid 273 (emphasis in original, citation omitted).
(89) Ibid 274.
(91) Ibid 274-5.
(92) Ibid 275.
(94) Ibid 283-4.
(95) Ibid 277, quoting Mason J in Handley v Federal Commissioner of Taxation (1981) 148 CLR 182, 195.
(96) Payne (2001) 177 ALR 270, 277.
(97) Ibid 281, quoting Parsons, above n 6, 454.
(98) Payne (2001) 177 ALR 270, 281.
(99) Ibid 282.
(100) Ibid 281.
(103) Ibid 283-4.
(104) Ibid 284.
(105) Parsons, above n 6.
(106) Payne (FC) (1998) 39 ATR 356, 372; Payne (FFC) (1999) 90 FCR 435, 446-7 (Sackville and Hely JJ), 438 (Hill J); Payne (2001) 177 ALR 270, 281 (Gaudron and Gummow JJ). The phrase `working expense' was not invented by Professor Parsons but is derived from some of the early cases, including Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 and John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30, where it is used in contradistinction to a capital expense. This is the main use of the concept by Parsons. The judges in Payne generally use the concept in this way, apart from Hill J.
(107) Parsons, above n 6, 306-7.
(108) Ibid 318.
(109) Ibid 476.
(110) (1972) 128 CLR 171.
(111) Parsons, above n 6, 471.
(112) Payne (2001) 177 ALR 270, 274 (Gleeson CJ, Kirby and Hayne JJ).
(113) Ibid 275.
(114) Ibid 274.
(116) Ibid 272 (Gleeson CJ, Kirby and Hayne JJ), 281 (Gaudron and Gummow JJ).
(117) Ibid 283. See also Payne (FFC) (1999) 90 FCR 435, 446 (Sackville and Hely JJ).
(118) Payne (2001) 177 ALR 270, 281-2.
(119) Ibid 283.
(120) Finn (1961) 106 CLR 60.
(121) Payne (2001) 177 ALR 270, 283-4.
(122) Payne (FFC) (1999) 90 FCR 435, 445.
(123) Ibid 446.
(124) Ibid 445.
(125) Butler, above n 6, 399.
(126) Ibid 400.
(127) Lee Burns and Rick Krever, `Individual Income Tax' in Victor Thuronyi (ed), Tax Law Design and Drafting (1998) vol 2, 495, 496.
(128) This history is surveyed in David Russell, `Sub-Section 51 (1): Disquieting Trends in the Courts' (Pt 1) (1994) 2 Taxation in Australia Red Edition 161.
(129) Taxation Act 1884 (SA) s 12(9).
(130) Land and Income Tax Assessment Act 1895 (NSW) s 28(1).
(131) Income and Corporation Taxes Act 1988 (UK) c 1.
(132) Income and Corporation Taxes Act 1988 (UK) c 1, s 1(1), schs A-F. See CCH, British Tax Reporter, vol 2 (at 666-2-00) [201-250] for more detail. See also Hugh Ault (ed), Comparative Income Taxation: A Structural Analysis (1997) 156, especially the chapter by John Tiley, `General Description: United Kingdom' in Hugh Ault (ed), Comparative Income Taxation.` A Structural Analysis (1997) 109.
(133) Russell, above n 128, 162.
(134)  AC 422, 428.
(135) The appropriateness or otherwise of this application of UK authority is discussed in Graeme Cooper, Richard Krever and Richard Vann, Income Taxation: Commentary and Materials (3rd ed, 1998) 112-13.
(136) This was the settled and undisputed principle that Dixon CJ referred to in Lunney, contrary to the implication in Payne that in Lunney Dixon CJ was referring to the undisputed principle to limit allowance of deductions to expenses incurred `in the course of' deriving assessable income: Payne (2001) 177 ALR 270, 275 (Gleeson CJ, Kirby and Hayne JJ).
(137)  Ch 7 (`Newsom'). See also Cook (Surveyor of Taxes) v Knott (1887) 2 Tax Cas 246; Friedson v Glyn-Thomas (1922) 128 LT 24; Ricketts v Colquhoun (Inspector of Taxes)  1 KB 725; Nolder v Walters (1930) 15 Tax Cas 380; Blackwell v Mills (1946) 174 LT 217; Durbidge v Sanderson (1955) 3 All ER 154.
(138)  AC 194.
(139) Payne (AAT) (1997) 46 ALD 718, 731.
(140) Income Tax Act 1952 (UK) c 10, sch D.
(141) Newsom  Ch 7, 15 (Somervell LJ), 16 (Denning LJ), 18 (Romer LJ).
(142) Ibid 16.
(143) (1958) 100 CLR 478, 485-6.
(144) Parsons, above n 6, 470; see also Wallace, above n 6.
(145) Cf Lunney (1958) 100 CLR 478, 501 (Williams, Kitto and Taylor JJ).
(146) Although there are dicta in the joint judgment in Lunney that suggest the Court might have applied the Newsom approach even to travel between related business premises, at least where one place of business is at home: see ibid 499 (Williams, Kitto and Taylor JJ).
(147) See Parsons, above n 6, 8-22, contrasting the judicial approach with the economist's view of income.
(148) Income Tax Assessment Act 1936 (Cth) s 79D.
(149) Income Tax Assessment Act 1997 (Cth) div 900.
(150) Income Tax Assessment Act 1997 (Cth) s 35-10(2) (emphasis added). Div 35 was inserted by the New Business Tax System (Integrity Measures) Act 2000 (Cth) sch 1, effective from the 20004)1 income year. Draft Taxation Ruling TR 2000/D16,  states that `business activity' means an activity that may be a complete business in itself, or part of a larger business, and includes (applying s 35-10(3)), `business activities of a similar kind.'
(151) Income Tax Assessment Act 1997 (Cth) s 35-10(2).
(152) Parsons, above n 6, 306. This view has support in the statement by Menzies J in Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494, 498: `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'. However, judicial statements in Handley v Federal Commissioner of Taxation (1981) 148 CLR 182, 194 (Mason J), 196 (Murphy J), 202 (Wilson J) and Federal Commissioner of Taxation v Forsyth (1981) 148 CLR 203, 216 (Wilson J) indicate that the `private or domestic' limb of s 51(1) may have independent operation.
(153) (1958) 100 CLR 478, 501.
(154) I have analysed this in more depth in my discussion of the `private' family in the tax system: Miranda Stewart, `Domesticating Tax Reform: The Family in Australian Tax and Transfer Law' (1999) 21 Sydney Law Review 453, 461.
(155) Henry Simons, Personal Income Taxation (first published 1938, 1970 ed) 53-4.
(156)  Ch 7, 16.
(157) Parsons, above n 6, 477.
(158) Payne (FFC) (1999) 90 FCR 435, 436 (Hill J).
(159) Payne (2001) 177 ALR 270, 281. Gaudron and Gummow JJ referred to Hill J, who also made this observation in the Federal Court in Payne (FFC) (1999) 90 FCR 435, 436.
MIRANDA STEWART, BSc, LLB (Hons) (Sydney), LLM (International Tax) (New York); Senior Lecturer, Law School, The University of Melbourne. With thanks to Bianca Levis for her excellent research assistance, and to Ann O'Connell for her comments.
MIRANDA STEWART, (2001) 177 ALR 270 (`Payne').
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|Publication:||Melbourne University Law Review|
|Date:||Aug 1, 2001|
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