Scott and Commissioner of Taxation [2003] AATA 289; (2003) 52 ATR 1075; 2003 ATC 2097 (28 March 2003)

Last Updated: 1 October 2009

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2003] AATA 289

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2001/559-561

TAXATION APPEALS DIVISION		)
	Re		DONALD IVOR SCOTT

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr B J McCabe, Member

Date 28 March 2003

Place Brisbane

Decision

The Tribunal affirms the objection decision under review.

(Sgd) B J McCabe
Member

CATCHWORDS

TAXATION – income tax – whether overseas travel costs, computer depreciation and motor vehicle expenses are allowable deductions
Taxation Administration Act 1953
Income Tax Assessment Act 1936
Sale of Goods Act 1896

Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4634
Moorhouse v Angus & Robertson (No 1) Pty Ltd [1981] 1 NSWLR 700
Re Scott and Commissioner of Taxation [2003] AATA 1158
Re Scott and Commissioner of Taxation [2003] AATA 1236
Federal Commissioner of Taxation v Finn [1961] HCA 61; (1961) 106 CLR 60
Lunney and Hayley v Federal Commissioner of Taxation [1958] HCA 5; (1958) 100 CLR 478
Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161
Case 7/93 [1993] AATA 436; (1993) 93 ATC 135

Welling, Property in Things in the Common Law System (Scribblers Publishing, 1996)

REASONS FOR DECISION

28 March 2003

Mr BJ McCabe, Member

INTRODUCTION

1. The applicant, Donald Scott, asked the Tribunal to review objection decisions in relation to the years of income ending 30 June 1993, 1994 and 1995. The applicant claimed a deduction in respect of motor vehicle expenses in all three years of income. He used different methods of substantiation in 1994 and 1995. He also claimed depreciation on a computer in the 1992-1993 and 1993-1994 years of income. Lastly, Mr Scott claimed a deduction in respect of the costs of overseas travel that he said he undertook for work purposes. A claim in respect of the cost of a trip to attend a conference was conceded by the respondent as the evidence unfolded during the course of the hearing.

THE MATERIAL BEFORE THE TRIBUNAL

2. The Tribunal was provided with the documents required under section 37 of the Administrative Appeals Tribunal Act 1975. It heard oral testimony from Mr Scott, who was represented by his mother, Mrs Clara Scott. Mrs Scott is a tax agent. Mr Aftanas represented the Commissioner. The Tribunal file also included two statements of Mr Scott that were filed on his behalf during the course of proceedings. A bundle of receipts was also produced on behalf of the applicant.

THE APPLICANT’S BURDEN OF PROOF

3. The Commissioner relies on section 14ZZK of the Taxation Administration Act 1953. The provision says the Commissioner’s assessment must stand unless there is reason to believe it is wrong.

THE APPLICANT

4. Mr Scott is a hydro-geologist. He specialises in ground water and surface water investigations. He supervises drilling processes in order to obtain information. He said he also makes extensive use of computers and computer modelling techniques in his work. It was apparent from his evidence that he was something of a pioneer in the use of computers in the field. He completed his undergraduate degree in 1990 and subsequently undertook postgraduate study.
5. Mackie Martin and Associates Pty Ltd employed the applicant as a hydro-geologist on 22 June 1992. The company (or at least the business of the company) was acquired by PPK Consulting Pty Ltd on 30 June 1993. He remained employed in the business on the same terms and conditions. His work required him to spend a portion of time in the field. He needed a four-wheel drive that was reliable. His vehicle was effectively a mobile office.
6. The applicant left the employ of PPK on 3 June 1994. He and his wife travelled overseas through North America, the United Kingdom and Africa. While in the United Kingdom he accepted a short-term (five week) contract with a consulting firm doing the same work he had been doing in Australia. He intended to accept a job in Nigeria but his wife fell pregnant and the couple returned to Australia in March 1995. The applicant resumed employment with PPK upon his return. He said he got a substantial pay-rise when he got back. He remained with the firm until September 1996.

THE DEPRECIATION OF THE COMPUTER

7. Mr Scott was a keen computer user. He acquired his own machine prior to commencing work with Mackie Martin in June 1992. There was no receipt in evidence but it seems clear enough from the bundle of receipts provided to the Tribunal that the machine was purchased from Crydex Computers in Mosman in NSW for $3500.
8. The applicant said he was surprised to find his new employer did not make extensive use of computers in its operations. He said the information technology infrastructure was much less advanced than what he had been used to at the Department of Water Resources, his former employer. The staff at Mackie Martin had not embraced the new information technology that was available in the marketplace. Mr Scott set about changing that, and he took his computer to work.
9. The applicant’s employer was very pleased with the innovation. Mr Scott was given a pay rise of $3500 just three months after he commenced work at Mackie Martin – he said in recognition of his sterling work. The respondent said Mackie Martin effectively bought the computer from Mr Scott.
10. The applicant left his computer at work. His employer purchased a new and more powerful computer the following year, which Mr Scott took over. His old computer was passed to another employee. Mr Scott ceased to have possession of the old machine, and he did not use it at the office. There was no evidence about what happened to the machine thereafter; Mr Scott appeared not to care.
11. The respondent said the applicant is not entitled to claim depreciation on the computer beyond the point three months after the applicant’s employment commenced with Mackie Martin when the computer was effectively sold to Mackie Martin. The applicant said in his oral testimony that the pay-rise he received at that first review was a reward, not payment for the computer.
12. Section 54(1) of Income Tax Assessment Act 1936 (ITAA36) says depreciation claims can be made on items owned by the taxpayer. It is therefore necessary to decide whether, in all the circumstances, ownership of the computer can be said to have passed from the applicant to his employer.
13. The property was not transferred by way of gift. That much is clear. The respondent says the applicant effectively sold the computer to his employer. The starting point for the analysis is the Sale of Goods Act 1896. Section 4(1) provides:

“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the ‘price’.”

14. The reference to “property”’ in the goods is a reference to ownership. “Ownership” is not a well-defined concept in Australian law. The Full Federal Court suggested in Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 98 ATC 4634 at 4640 that ownership might be regarded (depending on the context in which the word is used) as "the entire dominion of the thing said to be owned". “Dominion” is a concept borrowed from Roman law. Like any borrowed concept, it must be treated with caution as there may be difficulties in translation. Professor Welling in his work Property in Things in the Common Law System (Scribblers Publishing, Australia, 1996 at 35) suggests:

"Ownership is a form of property in things. A holder of ownership of a thing either (i) holds possession of the thing which no one is at liberty to interfere with, or (ii) holds, or will when a contract expires hold, right to immediate possession of the thing, while someone else holds possession or right to immediate possession after transfer."

15. Mr Scott and his employer entered into an agreement at the time of Mr Scott’s performance review. Under that agreement Mr Scott apparently gave up his rights with respect to the machine, and it passed into his employer’s care and control with no suggestion that it would be returned – and it was not returned. Property in the computer, including the ultimate right to its possession, passed to Mr Scott’s employer. I think there was a transfer of property by way of sale. It is true Mr Scott (and his employer) might not have characterised the transaction in those terms, but it is a question of fact in each case as to whether a sale occurred. Having regard to all the circumstances, I think the definition in section 4(1) of the Sale Goods Act 1896 is satisfied. If it was not a sale, it was a transfer of ownership by abandonment. Mr Scott abandoned the property to his employer, and made it clear by his conduct that he had no intention of reclaiming it: see Moorhouse v Angus & Robertson (No 1) Pty Ltd [1981] 1 NSWLR 700 at 706 per Samuels JA. In either case, Mr Scott is unable claim depreciation in respect of the computer by reason of section 54(1) of ITAA36.

THE MOTOR VEHICLE EXPENSES

16. The applicant claimed a deduction in respect of motor vehicles expenses incurred in all three years of income.
17. Mr Scott explained in his statement that he required access to a four-wheel drive vehicle for work purposes. Much of his work was in the field, he said. I have no reason to doubt his account on this point: I am satisfied he needed a four-wheel drive vehicle and that he used it primarily, if not exclusively, in connection with his work. Mr Scott said he was not happy with the state of the vehicles supplied by his employer, so he acquired his own. His first vehicle was a Nissan Patrol. It was written off following an accident in September 1993. He then purchased a Mitsubishi Pajero that was sold sometime prior to his trip overseas in June 1994. He also had the use of a Ford Falcon that has featured in other cases involving members of the Scott family: see Re Scott and Commissioner of Taxation [2003] AATA 1158 and Re Scott and Commissioner of Taxation [2003] AATA 1236.
18. I turn firstly to the law applicable to claims made in the years of income ending on 30 June 1993 and 1994. As a general proposition, a taxpayer wishing to claim a deduction in respect of car expenses should maintain a logbook: sections 82KUB, 82KUC. The amount of the claim under the general deduction provision is regulated by section 82KUD where a logbook is maintained. The applicant did not keep a logbook because he took the view “the vehicle was not a car”.. He said he was under the impression it was unnecessary to maintain a logbook because the vehicle was a four-wheel drive used exclusively for work purposes. He was wrong as to the first contention: four-wheel drive vehicles are clearly “cars” under section 82KT for the purposes of claiming car expenses: see also Case 7/93 [1993] AATA 436; (1993) 93 ATC 135 at 142. But the applicant’s claim that he was not required to maintain a log-book because the vehicle was used solely for work purposes requires closer consideration.
19. Section 82KV(4) provides that where a vehicle is used in an exempt manner the obligation to maintain a log-book may be waived. To qualify for the exemption, the taxpayer in this case must establish firstly that each of the vehicles was “designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers)”: section 82KV(4)(a)(ii). The taxpayer must also establish the vehicles were used exclusively in connection with the earning of assessable income: section 82KV(4)(2)(b)(i) and that they were not used for any other purpose: section 82KV(3)(a)(ii).
20. Mr Scott acknowledged there was at least some private use of the vehicles in question, although he and his wife made use of Mrs Scott’s Laser (and then her Pulsar) for most private purposes. In an unsworn statement provided to the Tribunal along with a bundle of documents after the hearing, Mr Scott said:

“Although the applicant used his vehicle on occasions for private use, his vehicles were 100% work vehicles.”

Confusing as it is, the statement tends to confirm the work vehicles were occasionally used for private purposes.

21. In any event, it was unclear to me whether the vehicles in question qualified for the exemption because it appeared from the limited evidence presented in relation to them that they were equipped with seating for a number of people apart from the driver. In other words, they were designed for carrying passengers, even if they had other uses. The exemption from the obligation to maintain a log-book is therefore unavailable..
22. Where there is no log-book and no exemption available in respect of that log-book, the taxpayer may only claim under sections 82KW or 82KX. The Commissioner says section 82KX is not available in this case because each vehicle travelled more than 5000 km. The Nissan Patrol, for example, travelled 33,550km in one year according to a table prepared by the applicant. The Commissioner says the wording of the section means a taxpayer cannot elect to claim only in respect of the first 5000 km of business travel: see Case 7/93 [1993] AATA 436; (1993) 93 ATC 135 at 142.
23. Section 82KW is available where the vehicle has travelled more than 5000km. The section requires that the taxpayer make an election between:
    • section 82KW(2) which provides for the taxpayer to obtain a deduction equal to 33 1/3% of the amount that would have been deductible if the car had been owned for a whole year and used exclusively for business purposes, and
    • section 82KW(3) which provides for a deduction equal to 12% of the cost of a car owned by the taxpayer.
24. The Commissioner noted the taxpayer may only rely on section 82KW(2) where he or she has maintained records of expenditure, including receipts. The Commissioner said that was not done here. I agree. Although the applicant provided some documents to the Tribunal – including some that came to light after the hearing, like roadworthy certificates – they do not provide sufficient detail to satisfy the Commissioner that the claims were in order. The applicant is therefore restricted to making a claim under section 82KW(3).
25. The applicant faces the same obstacles with respect to any claim he might make in respect of motor vehicle expenses in the year of income ending 30 June 1995. Deductions in that period were dealt with under Schedule 2A of the Income Tax Assessment Act 1936. The applicant’s failure to keep a log-book prevents him from claiming a deduction under section 6-1(2) of the Schedule. The failure to keep proper records to substantiate the expenses prevents the applicant from claiming under the “one third of actual expenses method” set out in Division 5 of the Schedule: see section 5-4. The Commissioner concedes the taxpayer may claim a deduction using the “cents per kilometre method” provided for in Division 3, or under the “12% of original value” method under Division 4.
26. There was also a reference to a claim for a deduction in respect of the costs arising out of the applicant’s use of a Ford Falcon vehicle. There was no evidence presented to confirm the applicant owned or leased the vehicle. He is therefore unable to claim a deduction in respect of that vehicle since the legislation requires that he be the owner or leaseholder of the vehicle to make a claim: see subdivision F of Div 3 of Part III of ITAA36 in respect of claims relating to years of income prior to the year ending 30 June 1994. For later years of income, see Schedule 2A of ITAA36.

OVERSEAS TRAVEL

27. The applicant claimed a deduction in respect of the costs of an extensive overseas trip undertaken between June 1994 and March 1995. The applicant said the trip was undertaken in connection with his work. The Commissioner denied that the costs are deductible.
28. Consideration of the law with respect to deductions for self-education expenses necessarily begins with the decision of the High Court in Federal Commissioner of Taxation v Finn [1961] HCA 61; (1961) 106 CLR 60. An architect employed by the government undertook a tour of Great Britain during the course of his long service and recreational leave. He spent the whole time studying the latest trends in architecture and design. He had the enthusiastic support of his supervisors and there was evidence that his trip would assist him to obtain a promotion. His employer also made some contributions towards the costs of a side-trip to South America. The Court concluded the costs of the trip were deductible in the circumstances.
29. Dixon CJ identified (at 67-68) a number of factors that tended to suggest the expenditure was deductible under section 51(1). Mr Finn remained in the employ of the government, and his employer was prepared to say that experience and data obtained during the tour:

“must increase your professional efficiency, and hence your value to this Department, and must materially assist your future advancement to a higher position in the Department with consequent increase in income.”

30. Mr Scott produced an endorsement from his former employer, but it was not as broad as that offered in Finn. There was no evidence that the data or experience obtained was likely to be of special value to any particular projects or work contemplated by the employer. I note in any case that Mr Scott resigned before going overseas.
31. Mr Scott’s oral evidence made it clear he was interested in many of the sights he saw in North America like Niagara Falls. That makes sense. I have no doubt he would have derived more from the experience than the layperson without his background and experience. But after hearing his evidence and reviewing the diary notes he tendered and the decision in Finn, I formed the view that Mr Scott was sightseeing, not researching. At any rate, there was insufficient evidence for me to conclude that the expenses incurred in travelling throughout North America in particular bore the essential character of having been incurred in gaining or producing assessable income within the meaning of section 51(1): see Williams, Kitto and Taylor JJ in Lunney and Hayley v Federal Commissioner of Taxation [1958] HCA 5; (1958) 100 CLR 478 at 499.
32. The applicant argued he was intending to earn income from work as a hydro-geologist within the UK and elsewhere. He said the costs of his stay and of travel within the UK ought to be deductible on that basis. He did briefly work for a UK firm in a contract position, and he would have gone onto work in Africa but for the fact his wife fell pregnant.
33. The Commissioner said Mr Scott’s travel was not deductible to the extent that the costs were incurred in an attempt to obtain employment. The respondent relies on the decision of the High Court in Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161. In that case, Barwick CJ said (at 4162):

“the cost to an employee of obtaining his employment does not form an outgoing in the course of earning the wages payable in the employment.”

34. To the extent that the trip was a job-search, the costs are not deductible.

CONCLUSION

35. The objection decision under review is affirmed.
    

I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member

Signed: Sarah Oliver

Associate

Date of Hearing 4 November 2002

Date of Decision 28 March 2003

For the Applicant Mrs C Scott

For the Respondent Mr S Aftanas, ATO Legal Practice