Deductions - Revenue v Capital

What's good for the goose is good for the gander?

A Paper delivered at the Tax Institute’s 22nd National Tax Intensive Retreat
Sheraton Noosa Resort Queensland

The Honourable Justice Logan RFD 6 November 2014

RTF version - 235 KB

A Judge of the Federal Court of Australia

Insofar as the rhetorical question, "Deductions – Revenue v Capital - What's Good for the Goose is Good for the Gander?" is premised on the possibility of there being such a link, its short answer, is "No".

That is because there is no necessary symmetry between the character of a receipt and the character of an expenditure made with that aid of that receipt.

So much was established, or perhaps better put confirmed, by the High Court in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (GP International Pipecoaters).[1]

In that case, the taxpayer was a party to a contract with the State Energy Commission of Western Australia under which it undertook to coat pipes being used in the construction of a large natural gas pipeline. In order for the taxpayer to perform that contractual obligation, it was necessary for it to construct a plant. The contract made provision for the payment, by instalments of a sum referable to establishment costs. Those instalments were paid, the plant was constructed and the contract performed by the taxpayer. The Commissioner then assessed the taxpayer on the basis that the instalments formed part of its assessable income in the income years in which they were received.

The taxpayer disputed this inclusion. It contended that the instalments were receipts of capital, not income (their receipt preceded the introduction of capital gains tax). Its argument, as concisely summarised in the Commonwealth Law Reports, was this:

[The taxpayer] was contractually obliged to expend the money on the construction of the plant, which was useless to it other than to use as the structure for carrying out a profit making operation. The taxpayer had not been in business before. The cost of construction was not deductible because it went into the creation of a structural capital asset. That is a reason why it should not be characterised as income.[2]

It was said to produce a distortion "to treat as assessable income an amount the cost of obtaining which is not an allowable deduction".[3] This was:

… because inherent in the notion of commercial profit is that the cost of obtaining an inflow will ordinarily be deductible. If the terms upon which the inflow is obtained are such that that taxpayer is precluded from obtaining a deduction, the equation will be distorted.[4]

The submission that the taxpayer was contractually obliged to expend the establishment cost instalments on the construction of the plant was not accepted by the High Court to be a correct interpretation of the contract.[5] Rather, the true contractual position was that the taxpayer was free to fund that construction as it chose, albeit that it was to be put in funds to the extent of the total establishment fee. Of interest for present purposes is the High Court's further observation that, "even if the establishment costs were received for the purpose of expenditure on the construction of the plant, it does not necessarily follow that their receipt was a receipt of capital".[6]

In expanding on why this did not necessarily follow, the High Court first summarised the position which obtains in respect of characterising expenditure for the purposes of Australian income tax law:

The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation; Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation ; Cooper v. Federal Commissioner of Taxation (affirmed on other grounds) …

[Footnote references omitted][7]

The paramount consideration then for income taxation purposes in relation to the expenditure side of the ledger is the character of the advantage sought by the expenditure. On the revenue side, as GP International Pipecoaters affirms, the character of a receipt in the hands of its recipient is not governed by the manner in which that recipient chooses to expend it. That the taxpayer in that case expended the contractually derived receipts on capital account in the construction of an industrial plant so as to commence a business did not mean that those receipts were receipts of capital.

A related notion, put to rest in Federal Commissioner of Taxation v Rowe (Rowe),[8] was that there was some "general principle" that a receipt which compensated a taxpayer for an amount previously allowed as a deduction must necessarily be income. In denying that there was any such principle, the majority in Rowe emphasised that the promotion of such principles diverted attention from what the language of the taxing statute required. Relevantly, that was whether the receipt was income according to ordinary concepts, not whether it was referable to a sum previously allowed as a deduction. They observed:

[T]he fundamental difficulty in the way of the "general principle" is that it diverts attention from the inquiry demanded by the Act, as that inquiry has generally been understood, namely, is the receipt income according to ordinary concepts?[9]

So far as deductions are concerned, the language of s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) and, for those of us further advanced than others on the path towards statutory senility, s 51(1) of the Income Tax Assessment Act 1936 Cth) (ITAA36), is, on the one hand, commendably economical and familiar yet, on the other, enduringly difficult in its application in novel cases thrown up by entrepreneurial ingenuity, changes in commercial practice, human diversity and business or geopolitical turbulence.

Further consideration of the question posed in the topic must, as with any revenue law controversy, commence with the language of the statute. Section 8-1 of the ITAA97 provides:

8-1 General deductions

(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 your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other 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; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12-5.

(3) A loss or outgoing that you can deduct under this section is called a general deduction.

For the effect of the GST in working out deductions, see Division 27.

Note If you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20-A.[10]

Answering the rhetorical question posed apart, the Institute's intention in respect of this topic is that particular consideration be given to some recent cases and to an Income Tax Ruling. That is for the purpose of seeing whether there is some discernible trend in the former and whether the latter is otiose. That consideration is best undertaken against the background of a summary of what has come to be settled about the meaning of the language employed in s 8-1 and its predecessor.

As an initial observation in relation to the language of s 8-1, the presence of the phrase, "to the extent that" where first appearing in the provision, means that it contemplates apportionment: Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (Ronpibon Tin).[11] In that case,[12] the High Court envisaged at least two possible kinds of apportionment:

"One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently."

In his influential text, Income Taxation in Australia, the late Professor Parsons posed, in respect of what is now s 8-1, a rhetorical question as to whether what are now found in s 8‑1(2) (formerly the concluding words of s 51(1)) are truly exceptions to the two positive limbs of the provision, now found in s 8-1(1)?[13] In his view, the answer to this question is that they are not true exceptions but are rather intended to emphasise why, "to the extent that" an outgoing is not within one or the other of the two positive limbs, it will be denied deduction.[14] For this view there is, as Professor Parsons noted,[15] support to be found in the observation made by Aickin J in Handley v Federal Commissioner of Taxation[16] that the provision (then s 51(1)), does not require "a two-stage apportionment". In other words, the appearance of "to the extent that" in the current s 8-1(2) is to be read with that same phrase in s 8-1(1) and serves "merely to emphasise that to the extent that an outgoing is not within one of the limbs, it will be denied deduction because it is capital, private or domestic".[17]

The root authority in respect of determining whether an outlay qualifies as a deduction under s 8-1 or is not allowable, because it is an outgoing of capital, is the judgement of Dixon J (as his Honour then was) in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation.[18] Dixon J referred to three indicators.[19] I have already mentioned the foremost of these namely, the character of the advantage sort by the outlay. The following summary of the three indicators identified by Dixon J has the advantage of that of a unanimous Full Court constituted by all seven judges of the High Court in Mount Isa Mines Ltd v Commissioner of Taxation:

(1) the character of the advantage sought and, in this respect, its lasting qualities and recurrence may play a part; (2) the manner in which the advantage is to be used, relied upon or enjoyed and, in this respect as well, recurrence may play a part; and (3) the means adopted to obtain the advantage, that is, whether a periodical reward or outlay is provided to cover its use or enjoyment for periods commensurate with the payment or whether a final provision or payment is made so as to secure future use or enjoyment.[20]

The other two indicators mentioned in this passage, "the manner in which the advantage is to be used, relied upon or enjoyed" and "the means adopted to obtain the advantage" could be regarded as subsets of the character of the advantage sought but it assists the determination of deductibility separately to advert to them.

Ordinarily, in deciding whether an amount is allowable as a deduction under s 8-1 of the ITAA97, it "is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent".[21] Where, however, the expenditure concerned is productive of no assessable income or there is a great disproportion between the expenditure and any assessable income which can be seen to be derived, the motive of the taxpayer in the incurring of the expenditure can be relevant if not decisive in a practical, common sense identifying and weighing up of the direct and indirect objects of incurring the expenditure.[22] Even so, if in that weighing up and notwithstanding disproportion what remains is a genuine rather than colourable incurring of the expenditure for the gaining or producing of assessable income then the whole will be deductible under s 8-1. In other cases, that weighing up may disclose but a colourable incurring of the expenditure for gaining or producing assessable income while in yet others the result may be apportionment.

The expenditure claimed need not be productive of assessable income in the year in which it was incurred in order to be deductible under s 8-1 of the ITAA97. The relationship posited by the section is at a greater level of abstraction than this.[23] Further, it is the ultimate object of the incurring of the expenditure which is critical to determining eligibility for its deduction.[24]

Expenditure which is nothing more than a prerequisite to the gaining or producing of assessable income cannot be characterised as having been incurred in (in the course of) gaining or producing that income.[25]

Expenditure falling within the second limb of s 8-1 i.e. that incurred in carrying on a business for the purpose of gaining or producing assessable income will often, where it has a voluntary quality, also fall within the first limb of that provision. In John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation,[26] Fullagar J expressed the view that the second limb of the provision, "may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is generally regarded as unavoidable."

Against this background, I turn to consider whether there is any trend evident in a series of cases identified as of interest by the Institute. Those cases are:

  • National Australia Bank Ltd v Federal Commissioner of Taxation[27] (NAB Case);
  • Tricare Group Pty Ltd v Federal Commissioner of Taxation[28] (Tricare Case);
  • Retirement Village Operator v Federal Commissioner of Taxation[29] (Retirement Village Operator Case);
  • Hartley v Federal Commissioner of Taxation[30] (Hartley).

As an initial observation, the Tricare, Retirement Village Operator and Hartley Cases were each decided in the Administrative Appeals Tribunal (AAT). None was the subject of any subsequent decision on an appeal to the Federal Court of Australia on a question of law pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth), much less of any further appeal.[31]

Cases decided to finality in the AAT quell the particular controversy between the taxpayer and the Commissioner. Where, as these AAT cases did, the quelling of that controversy entails the application to particular facts of settled principles of law concerning the meaning and effect of a particular provision in the ITAA36 or ITAA97, the decision of the AAT has little, if any, value as a precedent. Indeed, the temptation, even in respect of exercises of original jurisdiction by the Federal Court in a tax appeal, to elevate mere applications of settled principles to particular facts into some new principle or to derive from mere facts cases some sort of check list of criteria for or against deductibility is one to be resisted. All that is apt to do is to divert attention from the language of s 8-1, as explained either at ultimate appellate level or, if not, at intermediate appellate level.[32]

The NAB Case was decided by a Full Court of the Federal Court with special leave to appeal thereafter being refused by the High Court. That special leave was refused is indicative that, in this case too, no error of principle was discerned. Instead, the NAB case nicely illustrates the singularly difficult questions which do occasionally arise as to how to apply settled principle concerning s 8-1 to particular facts.

The question at issue in the NAB Case was whether the NAB was entitled to a deduction under s 51(1) of the ITAA36 in respect of the sum of $42 million which it paid to the Commonwealth for an exclusive right, for a period of 15 years, to participate as the lender under the scheme of housing loan assistance to members of the Australian Defence Force in respect of their home loans.

The NAB Case exemplifies the enduring accuracy of an observation long ago made by the High Court in Western Gold Mines (NL) v Commissioner of Taxation (WA) that the determination of whether expenditure is on revenue or capital account necessitates the making of "both a wide survey and an exact scrutiny of the taxpayer's activities".[33] Viewed against the broad sweep of the liberalisation of competition which had occurred in the Australian banking sector, the related seeking by the banks of enhanced market share and the opportunity offered by a change in government policy as to how defence service housing loans might be offered, the expenditure incurred by the Bank was in the nature of a marketing expense. The only reason for the lump sum payment in the NAB Case (and the contemplated annual payments), like that made by BP Australia in BP Australia Ltd v Federal Commissioner of Taxation (BP Australia),[34] was to increase sales of the Bank's product.[35]

In the NAB Case, the Full Court reversed the conclusion of the primary judge that the lump sum paid was an expenditure on capital account. In BP Australia, the result was even more dramatic. Both in the original jurisdiction and at intermediate appellate level (by a 3-2 majority) the assessment disallowing the claimed deduction, because it was an expenditure of capital, was upheld, only to be reversed by the Judicial Committee of the Privy Council at what was the then ultimate appellate level in respect of a federal tax dispute.

It is in the nature of judicial decision making that it yields a certain result. The certainty of a particular result can sometimes be much more apparent in hindsight than in prospect. The NAB Case and, for that matter, BP Australia offer reminders of this. Any judgement of Heerey J, the judge who exercised the original jurisdiction in the NAB Case, commands respect. A one off, lump sum payment for an exclusive right looks very much like an outlay of capital. So it was held in the original jurisdiction in the NAB Case. In BP Australia, four of the six High Court judges who sat either in the original jurisdiction (Taylor J) or on appeal (McTiernan, Windeyer and Owen JJ) in the case considered that the various outlays made by BP Australia were on capital account and not deductible. Only the circumstance that, in those days, a further appeal lay by special leave to the Judicial Committee led to a change in that outcome and the upholding of the contrary view of the minority in the High Court (Dixon CJ and Kitto J).

In another profession of which I have been a member, fortunately without having to put theory into practice, the profession of arms, two adages in relation to operational planning in respect of any phase of war, are emphasised, both in initial commissioned appointment training and at staff college. They are, "Time spent on reconnaissance is never wasted" and "Never situate an appreciation". The meaning of the former is clear enough; the latter cautions against bringing a preconceived notion to an analysis of factors relevant to an appreciation of the courses open in respect of a particular tactical problem and the consequential formulation of a plan. That cautionary note is sounded because the risk with preconception is that one will tailor one's observations to the preconceived idea, discarding or ignoring those which do not fit. Each of these adages has relevance by analogy for a tax professional either in private practice or within the Australian Taxation Office.

What supplied the wider context which proved decisive in the NAB Case and in BP Australia was not just a thorough understanding of relevant considerations arising from settled principles in relation to the eligibility of expenditure for deduction under s 51(1) but also, via time well spent on a factual "reconnaissance", of the nature of the taxpayer's business operations and the prevailing conditions in the market in which it carried on business and the gathering and adducing of evidence on these subjects. That factual reconnaissance was productive of the evidence which supplied the decisive factual context. The importance of such informed and thorough preparation and presentation is not unique to a s 51(1) or, latterly, a s 8-1 case. Both in practice at the Bar[36] and as a judge[37] I have seen it also make a decisive difference in, for example, cases of alleged tax avoidance.

To bring to a s 8-1 problem the pre-conceived notion that a one-off, lump sum expenditure must be one on capital account is to run the risk of situating an appreciation of the revenue law consequences of particular facts. With such a pre-conceived notion, the presence of a one-off, lump sum payment can have about it a seductive quality which distracts attention in a particular case from viewing that payment in its wider context. By the same token, consideration of the character of the advantage sought by a taxpayer may mean that, even where payments are made by instalments and contractually described as rent, they are nonetheless in substance instalments of capital.[38]

More generally, a mechanistic use of check lists comprising a number of criteria drawn from the facts of particular cases (e.g. one-off lump sum payments are on capital account/payments by instalments are on revenue account) have a distracting quality. Criteria so derived may be like trees which prevent one from seeing the wood which the language of the statute as explained at ultimate appellate level is presenting on the particular facts to hand.

The experience of the NAB, as the evidence disclosed, was that its gaining the right to make defence service home loans was not a source of great profit. That experience of hindsight did not mean that there was an absence of an intention to gain or produce assessable income at the time when the Bank incurred the expenditure.

An undertaking does not have to be of the size and complexity of one of the "four pillars" of the Australian banking industry in order for a conclusion to be reached that, for example, it constitutes a business or that expenditure in what ultimately proves to be an unsuccessful venture nonetheless entailed a profit making intention at the time when it was incurred. An example of this from personal experience in practice is Peerless Marine Pty Ltd v Commissioner of Taxation.[39]

The taxpayer in that case, Peerless Marine Pty Ltd, was controlled by a Mr Stephenson, who had enjoyed conspicuous success in operating a company which carried on a dry-cleaning business. He also had a lifelong passion for boats and latterly powered catamarans. He married that passion with the financial resources available to him via his business success into a special purpose company, Peerless Marine Pty Ltd, which he hoped be successful in boat-building. Much time and money was devoted by that company to the production of a prototype vessel. The venture ultimately proved to be unsuccessful. A question arose as to whether Peerless Marine Pty Ltd could claim a deduction under s 8-1 in respect of expenditure directed to the construction of the prototype and claim related input tax credits. It was controversial as to whether Peerless Marine Pty Ltd had ever carried on a business and whether the expenditure was of a private or domestic character. What was crucial to the success enjoyed by Peerless Marine Pty Ltd in that case was the corroboration offered of Mr Stephenson's evidence by the founder and controller of what had proved to be a spectacularly successful boat building business. That person gave evidence of the crucial importance played in the generation of sales by a proven prototype vessel to show prospective customers. The linkage between prototype and sales enabled a conclusion to be drawn that a business had commenced at the outset of the construction of the prototype. As it happened, that corroboration came in the course of cross-examination from a witness called by the Commissioner. In hindsight at least, that provokes the thought that, had the Commissioner conducted a better factual reconnaissance, the case should never have proceeded to a contested hearing.

The Tricare Case is really nothing more than an application to particular facts of the same principles which informed the outcomes in the NAB Case and, before then, BP Australia. That is not to say that in its outcome the case may not have about it a clarity in hindsight that it perhaps did not have in prospect.

The taxpayer in the Tricare Case was the head of a group of companies which conducted a range of operations in and in relation to various forms of retirement accommodation and care. In the course of its operations it purchased a retirement village in Toowoomba. On the acquisition, the taxpayer became a successor party to the leases by residents of the units in the village. Some of the residents of the retirement village at the time of the acquisition chose to terminate the leases of the units in which they resided upon the taxpayer becoming the owner of the village. Under the terms of their various leases, those residents were entitled to be paid a share of capital appreciation payment. That share was known as an "exit entitlement". That payment or entitlement was calculated by reference to a percentage (up to 50 per cent) of the amount by which the incoming, replacement resident's contribution for the lease of the terminating resident's unit exceeded the like contribution which the terminating resident had paid. Eligibility to be paid the "exit entitlement" was a term of the leases signed by the residents. Its payment was also enforceable under the terms of s 71(1) of the Retirement Villages Act 1999 (Qld).

A principal source of income from the taxpayer's ownership of the retirement village came from Income from exit fees paid by terminating residents upon leaving the retirement village. The other principal source of income came from the various operational and maintenance fees paid by residents under the terms of their leases.

The Commissioner's contention was that the exit entitlement fees, claimed by the taxpayer as deductions under s 8-1, were expenditures on capital account and not allowable. It was put that they were made in discharge of the liability that the taxpayer undertook when acquiring the capital assets of the retirement village. The AAT found that the subjection of the taxpayer to the statutory obligation to make the refunds was but part of the price which it paid for the carrying on in Queensland of the business of owning and operating a retirement village. A thorough understanding of the nature of the business and of the obligations that entailed proved decisive. Given that understanding, it might, I respectfully suggest, equally have been added that, on the evidence, the making of such payments was but a periodic incident of conducting such a business.

Another comment which might be made in respect of the Tricare Case is that, even though the acquisition of the retirement village (including succession to the lessor obligations of unit leases) was an affair of capital, it did not follow that outgoings by the owner on the termination of unit leases by residents were expenditures on capital account.

The Retirement Village Operator Case arose against a similar factual foundation to the Tricare Case. In this case also what was controversial was whether exit entitlement payments made by the taxpayer in respect of leased units in one of a number of retirement villages which it operated could be deducted under s 8-1. In this case also the Commissioner unsuccessfully submitted that the payments were expenditures on capital account and thus not deductible.

The case illustrates the danger, to which I have already averted, in an uncritical elevation of a consideration which led to a conclusion on particular facts that an expenditure was not deductible to a principle that the presence of that consideration necessarily meant that such an expenditure could never be deductible. In this case, that consideration was that a lease termination payment was necessarily an expenditure of capital. Deputy President Deutsch, who constituted the AAT in the Retirement Village Operator Case neatly highlighted[40] the vice in this in his reminder that, although in Kennedy Holdings and Property Management Pty Ltd v Federal Commissioner of Taxation[41] Hill J had held on the facts of that case that a one-off payment of that kind was one of capital, his Honour had added, "[t]he present is not a case of a company whose business consisted of granting leases and obtaining surrenders of them as part of the normal ebb and flow of the business, in which event a different view of the matter might be taken".

Another useful lesson offered by the Retirement Village Operator Case is that evidence of the accounting treatment of a payment is relevant to but not determinative of the character of an expenditure for the purposes of s 8-1.

That accounting practice can be relevant in determining the character of an expenditure is highlighted by RACV Insurance Pty Ltd v Federal Commissioner of Taxation.[42] There, evidence as to the accounting practice of insurers that, in respect of compulsory third party insurance, provision should be made in respect of a loss or outgoing for "unreported claims" in accounts cast on an accrual basis formed part of the overall factual matrix of evidence concerning the conduct of an insurance business. In that context, the evidence proved decisive in the allowing of a deduction in respect of the loss or outgoing so provided for. That was contrary to the Commissioner's submission that a deduction only arose once the insurer's liability to indemnify an insured had been quantified by either a settlement of a claim or a judgment.

In the Retirement Village Operator Case, the Commissioner relied on evidence that the taxpayer, in accordance with its internal accounting practice, recorded the entitlement payments as debits against what were described as an asset revaluation reserve. In other words, they were classified as diminutions of capital. The AAT accepted that this was the correct accounting treatment. Even so, the AAT concluded that, to seize on this accounting treatment was to ignore the language of s 8-1 in its application to the facts. On the facts, the making of the entitlement payments was but part of the ordinary ebb and flow of income and expenditure in the business of operating retirement villages. It was thus not capital expenditure but deductible under s 8-1.

It might be thought that Retirement Village Operator Case, in light of the outcome in the Tricare Case, ought never to have been one in which the deduction was disallowed or at least the assessment concerned confirmed on objection. That may be too harsh a conclusion, for the taxpayer's internal accounting treatment understandably gave the Commissioner pause for thought. Again as so often in a s 8-1 case, the outcome in hindsight may well have a clarity that it did not in prospect.

Hartley concerned whether or not the taxpayer was carrying on a business for the purposes of s 8-1. Mr Hartley was a full time local government employee who also bought and sold shares. The question was whether the share trading which he conducted constituted the carrying on of a business. If it did, then the losses which he sustained would be deductible under s 8-1. If not, then the losses would be losses of capital only, dealt with under the CGT provisions of the ITAA97. On the facts, Mr Hartley's activities in respect of the share market look to have been rather more than a hobby. The evidence was that, in the 2010 year there were some 40 transactions with an overall turnover of $934,575 and in the 2011 year there were some 25 transactions with an overall turnover of $385,938. The AAT found that Mr Hartley's employer tolerated the diversions from his employment which from time to time occurred during the working day because of Mr Hartley's buying or selling shares and that he made up for time lost thereby by working back after hours.

In Hartley, too, the AAT was constituted by Deputy President Deutsch. His conclusion, in what he admitted was a finely balanced case, was that Mr Hartley was not carrying on a business of share trading. He was astute to commence his reasons with an acknowledgement that whether or not a business was being carried on was a matter of impression derived from a consideration of the whole of the facts. Having done this, he embarked on a piecemeal consideration of particular criteria which had been found in earlier cases to be relevant to a conclusion as to whether or not a business was being carried on, indicating as to whether on the facts of Mr Hartley's case that told for or against a conclusion that he was carrying on a business. Having done this, the Deputy President concluded as he had begun, which was to examine the facts as a whole so as to reach the decision that no business was being carried on.

The result in Hartley was, with respect, one in respect of which reasonable people might reasonably differ. But it entails no misapprehension of principle and the result is not so startling as to suggest that a conclusion that Mr Hartley was not carrying on a business was not one reasonably open such that an appeal on a question of law under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) would have been open.[43] Hartley is just a facts case. It most emphatically does not call into question the enduring relevance of the reminder offered by Walsh J in Thomas v Federal Commissioner of Taxation that "a man may carry on a business although he does so in a small way".[44]

This leaves for consideration a question posed by the Institute as to whether the Australian taxation Office Taxation Ruling, TR92/4, "Income tax: whether losses on isolated transactions are deductible: is still relevant?

There are circumstances arising from the operation of the rulings system found in Part 5-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) when it can be relevant for a judge to look at a ruling issued by the Commissioner. That may occur when a taxpayer appeals against an objection decision in respect of a private ruling. Departure from a ruling, public or private, may also be relevant in respect of a challenge to a penalty. Rulings can also bind the Commissioner to treat an individual taxpayer in a particular way. Occasionally, there arises before a court a question as to whether there has been a departure by the Commissioner from such an obligation. These types of cases apart, taxation rulings are for a court but the views of a particular party. They are no substitute for the language of the statute as explained by judicial authority. To give them any higher status than this in a judicial proceeding would be to violate the constitutional principle that there can be no valid law with respect to taxation unless it permits recourse to an exercise of judicial power for the final determination of a taxation liability.[45]

None of this is to deny the importance and utility for a practitioner of a taxation ruling. A ruling is an indication by the Commissioner as to his view of the operation of a taxation law. Internally, that should lead to a desirable consistency in the administration of that taxation law. Externally, a ruling gives a taxpayer the desirable advance knowledge as to how the Commissioner will administer that law in given circumstances.

On the expenditure side, Taxation Ruling TR92/4 does little more than recognise that an isolated transaction may be productive of a deduction under s 8-1 if a purpose of gaining or producing assessable income was present at the time of the expenditure. The High Court told us all this a long time ago in Ronpibon Tin.[46] In relation to a justiciable controversy concerning whether expenditure resulting from an isolated transaction is deductible under s 8‑1 of the ITAA97, it is what was said in that case and the facts of the case to hand, not TR92/4 which is relevant.

All in all, what the particular cases identified by the Institute for comment exemplify is that, in relation to s 8-1 of the ITAA97, as so often in human affairs generally, "Plus ça change; plus c'est la même chose" – the more things change the more they stay the same.

[1] (1990) 170 CLR 124.

[2] (1990) 170 CLR 124 at 127.

[3] Ibid.

[4] Ibid.

[5] (1990) 170 CLR 124 at 135.

[6] (1990) 170 CLR 124 at 137.

[7] Ibid.

[8] (1997) 187 CLR 266.

[9] (1997) 187 CLR 266 at 276-277.

[10] Its predecessor, s 51(1) of the ITAA36 provided:

51 Losses and outgoings

(1) 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, or are incurred in relation to the gaining or production of exempt income.

[11] (1949) 78 CLR 47 at 59.

[12] Ibid.

[13] RW Parsons, Income Taxation in Australia, Law Book Company, 1985 (Parsons), p 305, [5.8].

[14] Parsons at [5.9] – [5.10].

[15] Parsons at [5.10].

[16] (1981) 148 CLR 182 at 200

[17] Parsons at [5.9].

[18] (1938) 61 CLR 337.

[19] (1938) 61 CLR 337 at 363.

[20] (1992) 176 CLR 141 at 147.

[21] Cecil Bros Pty Ltd v Federal Commissioner of Taxation (1964) 111 CLR 430 at 434.

[22] Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 18-19.

[23] Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 at 68; Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 16-19.

[24] Steele v Deputy Federal Commissioner of Taxation (1999) 197 CLR 459 at [25].

[25] Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478.

[26] (1959) 101 CLR 30 at 40.

[27] (1997) 80 FCR 352.

[28] 2011 ATC 1-031.

[29] 2013 ATC 1-061.

[30] 2013 ATC 10-333.

[31] The Commissioner lodged an appeal in the Retirement Village Operator Case but this was withdrawn prior to its hearing.

[32] This vice is not confined to s 8-1 cases, as was recently highlighted in relation to the determination of residency for taxation purposes in Dempsey v Federal Commissioner of Taxation 2014 ATC 10-363.

[33] (1938) 59 CLR 729 at 740. Observations to like effect were made in Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at [55] and Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at [33].

[34] (1965) 112 CLR 386.

[35] NAB Case (1997) 80 FCR 352 at 367.

[36] For example, Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27.

[37] For example, RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785.

[38] See, for example, Jupiters Ltd v Federal Commissioner of Taxation (2002) 118 FCR 163.

[39] (2006) 63 ATR 1303 (AAT – Dep Pres Hack SC).

[40] 2013 ATC 1-061 at [38].

[41] (1992) 39 FCR 495.

[42] [1975] VR 1.

[43] As to the necessary restraint entailed in the exercise of original jurisdiction in a "statutory appeal" requiring a question of law where there is no error of principle, only a conclusion of fact in the application of principle, as to which reasonable people might reasonably differ, see, notably, Federal Commissioner of Taxation v Miller (1946) 73 CLR 93 at 103-104 per Dixon J. At the time, the High Court exercised original jurisdiction under s 196 of the ITAA36 in respect of an appeal from a Board of Review "involving a question of law". At present, an appeal on a question of law lies to the Federal Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the AAT. That original jurisdiction is not completely to be assimilated with its predecessor but the need for restraint in relation to what are truly nothing more than factual conclusions reasonably open remains.

[44] (1972) 46 ALJR 397 at 400-401; see also Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310.

[45] Deputy Federal Commissioner of Taxation v Brown (1958) 100 CLR 32 at 40; Giris Pty Ltd v Federal Commissioner of Taxation (1969) 119 CLR 365 at 378-379; MacCormick v federal Commissioner of Taxation (1984) 158 CLR 622; Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [9].

[46] (1949) 78 CLR 47 at 57.

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