Summer
2014/2015

Appendix
OBJECTIONS TO ASSESSMENT
FOR TIM BUTTON

REASONS FOR OBJECTION
Tim Button objects to his Amended Income Tax Assessment for the financial year ending 30 June
2014 (the income year), issued to him by Notice of Amended Assessment dated 30 November 2014
(XXX_24376898/987).

The total amount being objected to is $9.15 million in income and $4056 in deductions. The objected amount can be divided into the following:

Inclusion of income for overseas work

$

150000

Inclusion of sale of Lutwyche property

$

9000000

Blue overalls

$

(500)

Steel-capped boots

$

(270)

Meals purchased while truck driving

$

(3736)

1.

TIM’S SALARY AND EXPENSES FOR OVERSEAS WORK CANNOT BE PART OF

ASSESSABLE INCOME

This is in relation to all services income earned prior to 25 April 2014, from Singapore Offshore
Diving Company (SODC), for income year. The Income Tax Assessment Act 1997 (Cth) (ITAA97) stipulates that only ordinary1 and statutory2 income can be included in assessable income. Including expenses incurred and income earned abroad into assessable income is dependent on whether Tim is considered: 

an Australian resident, who is must have all sources of income assessed;3 or



a non-resident, who will only be assessed on amounts derived directly or indirectly from
Australian sources4 or specified within a specific statutory provision.5

The source of services income is generally derived from the place in which the services are performed.6 Duties for SODC commenced upon arrival to Singapore airport and never while in
Australia. Tim’s SODC work cannot be considered Australian sourced and its inclusion into assessable income will hinge on residency.

1

Income Tax Assessment Act 1997 (Cth) s 6-5.
Ibid s 6-10.
3
Ibid s 6-5(2).
4
Ibid s 6-5(3)(a).
5
Ibid s 6-5(3)(b).
6
FC of T v French (1957) 98 CLR 398.
2

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REASONS FOR OBJECTION
The Commissioner recognises several tests used to determine Australian residency under s 6(1) of the
Income Tax Assessment Act 1936 (Cth) (ITAA36). Those applicable in Tim’s scenario include residency according to ordinary concepts, the domicile test and the 183 day rule.7

Tim was not an Australian resident according to ordinary concepts. There are number of factors supporting this conclusion. First, while it is true that his family ties remain in Australia,8 Tim himself decided to keep his Singapore rental accommodation as his main residence for eating and sleeping.9
Second, all of his contracts between the 2013-2014 financial years were with a Singapore based company.10 Third, while it may be argued that there is a degree of continuity and routine in his trips to
Australia,11 these trips were treated as visits and with Tim maintaining his Singapore home.
Furthermore maintenance of an Australian abode was the responsibility of his family, as Australian residents, as opposed to himself.12 Fourth, Tim’s mode of life remained the same despite his family’s change of residence, only visiting Australia after completing work assignments. Fifth, Tim is a New
Zealand national.13
Tim’s domicile resided outside of Australia. This is a question of fact and degree, focusing on the continuity and durability of Tim’s association with the foreign country (Singapore) and duration of that presence.14 It is irrelevant that he ultimately intended to reside in Australia. Until he could find employment in Australia, Tim’s stay in Singapore for employment purposes remained indefinite and his permanent place of abode was in Singapore. This was consistent with his lifestyle prior to his decision to move, having lived in Singapore as far back as 2005. Furthermore, the durability of family connections in Australia was also weak prior to 25 April 2014, only staying with his family for one day out of two weeks during visits and spending the remainder of his time in hotels.

Tim has spent less than 183 days in Australia for the 2013-2014 financial year. In 2013 Tim spent
48 days in Australia. In 2014, he visited Australia eight times, for two weeks each. In total he could have spent up to 160 days in Australia for the financial year. Nearly a full month below the requisite
183 days. There is no ground for the inclusion of SODC income based on the above analysis.

7

Income Tax Assessment Act 1936 (Cth) s 6(1).
Strong family ties in the taxing nation are an important factor in determining residency: Levene v IR Commrs
[1928] AC 217.
9
Residence is often defined as where a person “eats and sleeps”: Cesena Sulphur Co Ltd v Nicholson (1876) LR
1 Ex D 428 at 452; FC of T v Miller (1946) 73 CLR 93 at 100.
10
Overseas business ties is a minor factor supporting non-Australian residency: Taxation Ruling TR 98/17 at
[56].
11
Individuals are usually regarded as Australian residents where there is a degree of continuity, routine or habit consistent with residing in Australia: Taxation Ruling TR 98/17.
12
Contrast with Rogers v Inland Revenue (1879) 1 TC 225; Slater v C of T (NZ) (1949) 9 ATD 1.
13
See for example Levene v IR Commrs 78 [1928] AC 217 at 223.
14
FC of T v Applegate 79 ATC 4307.
8

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REASONS FOR OBJECTION
2.

DEDUCTIONS WERE VALID INCLUSIONS IN ASSESABLE INCOME

Deductions for an individual are allowed under s 8-1(1)(a) ITTA97. A deduction for individual losses or outgoings are available to the extent that it is incurred in gaining or producing assessable income
(sufficient nexus).15 There two main tests in determining whether there is a sufficient nexus between self-education expenses incurred and income generated:16


The expense is incidental and relevant to producing assessable income;



The expense had an essential character of an income-related expense; and

Deduction claims are also subject to a number of negative limbs describing items incapable of deduction. Of relevance here are losses or outgoings of a:


capital or a capital nature;17 and



private or domestic nature.18

The Commissioner has relied on the above criteria and denied several deductions claimed by Tim.
However, with consideration to the relevant law and legal principles, it is submitted that the
Commissioner has erred in the application of several of the above elements/conditions.

2.1

Deductions for welding course fees

The Commissioner has cited two main reasons for denying welding course fees deductions:


an inability to find a sufficient nexus between the expenses and assessable income;



and the private nature of the deductions19

An objection is made on both grounds.
Generally, education to maintain or increase qualifications in a taxpayer’s field of expertise have been deemed incidental and relevant to income generation and may be subjecy to deductions.20 It is not necessary that the taxpayer be in employment at the time the course is undertaken, provided that the nature of employment would remain unchanged.21

15

Income Tax Assessment Act 1997 (Cth) s 8-1(1)(a).
These tests have developed over time, see for example: Herald and Weekly Times Ltd v FC of T (1932) 48
CLR 113; W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; Ronpibon Tin NL v FC of T (1949) 78 CLR 47.
17
Income Tax Assessment Act 1997 (Cth) s 8-1(2)(a).
18
Ibid s 8-1(2)(b).
19
Ibid s 8-1(2)(b).
20
FC of T v Highfield 82 ATC 4463; FC of T v Finn (1961) 106 CLR 60 at 70.
21
Case Y54, 91 ATC 471; FC of T v Finn (1961) 106 CLR 60; FC of T v DP Smith (1981) 147 CLR 578;
Fullerton v FC of T (1991) 32 FCR 486.
16

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REASONS FOR OBJECTION
The welding education was part of Tim’s ongoing training as a fitter and turner, suggesting it was necessary in maintaining / increasing his qualifications. There is a clear nexus between the expense and income earning activity. While it is conceded that Tim’s sons’ expenses should not be counted into deductions, an objection is raised against the Commissioner for dismissing the entire amount for tuition as private in nature when a reduction to a third of $3500 (approximately $1666.67) would have been more representative of the course’s relevancy to Tim.

2.2

Deductions for trucking employment based expenses were valid

The Commissioner did not believe Tim spent the amount claimed in travel allowance deductions.
Under Subdivision 900-B(3) of the ITAA 1997, a deduction is not allowable for a meal allowance expense or travel allowance expense, unless the it qualifies as a deduction under a provision of the
Act. Meal expenses incurred by a truck driver who sleeps away from home in the course of their work can be considered a deductable expense within the requirements of s 8-1 ITAA 1997.22 In addition, written evidence of the travel allowance expense must be obtained and retained by the employee taxpayer to substantiate a claim.23 Substantiation is not required where a claimed deduction does not exceed the reasonable amount.24
The current deduction amount claimed by Tim ($93.40 per day) was calculated based on reasonable amounts for truck driver travel allowances as per the 2014/2015 income year.25 It is acknowledged that the taxpayer may have erred in not relying upon the 2013/2014 reasonable amount ($91.60 per day)26 instead. Regardless, the Commissioner cannot rely an arbitrary assertion that the amount claimed is too much and is bound to either accept the deductions claimed as meeting the substation exemption (if
2014/2015 values apply) or request actual substantiation of expenses (if 2013/2014 values apply).
Neither has been done in this case and there are no acceptable grounds to support a denial in meal deductions. 2.3

Deductions for overalls and steel-capped boots

Clothing, uniforms and footwear expenses may be deducted where the clothing is protective in nature27 and/or occupation specific.28 This is on the condition that such expenses satisfy deductibility tests and are not private or domestic in nature.29 The Commissioner has relied on the latter condition to deny deductions for overalls and boots. The explanation of protective clothing in Taxation Ruling TR
22

Case E34, 5 TBRD (NS) 205.
Income Tax Assessment Act 1997 (Cth) s 900-50.
24
Ibid s 900-50(1).
25
Taxation Determination TR 2014/19 at para 12.
26
Taxation Determination TR 2013/16 at para 12.
27
Income Tax Assessment Act 1997 (Cth) s 34-20(2); Taxation Ruling TR 95/18 at para 41.
28
Taxation Ruling TR 95/18 at para 41.
29
Ibid.
23

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REASONS FOR OBJECTION
95/18, suggest a contrary conclusion. In that case, overalls and steel-capped boots have been recognised as protective clothing used by truck drivers.30 They were distinguished from heavy duty conventional clothing31 and conventional footwear,32 which were private in nature. The
Commissioner’s current decision runs counter to established rules and should be changed to allow for the protective clothing and footwear deductions.

3.

LEGAL EXPENSES INCURRED IN RELATION TO THE LUTWYCHE PROPERTY

SHOULD STILL BE DEDUCTED

Deductions are available for losses or outgoings to the extent that it is necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.33 The Commissioner has recognised that costs in relation to seeking council approval, such as legal expenses, are necessarily incurred in carrying on a business. This is consistent with the reasoning given in Steele v FC of T,34 where the court accepted the taxpayer’s argument that preparing plans and seeking council approval indicated that the interest expense was necessarily incurred in carrying on a business.
Taxation makes a clear distinction between income and capital, 35 which is assessed under a separate regime.36 While, proceeds for a property sale are generally considered capital gains. However the
ITAA97 provides that if a taxpayer is carrying on a business and the value of stock-on-hand (trading stock) has increased, the excess will be included in assessable income.37 While originally intended to be trading stock, Tim’s Lutwyche property did not meet the criteria for classification at the time of sale. As a result, the property sale must be considered a capital gain, excluded from assessable income.
Tim no longer intended to carry on the business of property development. Trading stock includes anything produced, manufactured, acquired or held for the purposes of manufacture, sale or exchange in the ordinary course of a business.38 Analogy can be drawn between the present case and Taxation
Determination TD 92/126. In that determination it was explained that the various subdivisions of land and building in property development acted as trading stock items for sale.39 Where development does

30

Taxation Ruling TR 95/18 at para 43-45.
Ibid at para 45; Taxation Determination TD 92/157.
32
Taxation Ruling TR 95/18 para 46.
33
Income Tax Assessment Act 1997 (Cth) s 8-1(1)(b).
34
99 ATC 4242.
35
See for example: Eisner v Macomber (1919) 252 US 189.
36
The Capital Gains tax regime: Brent v FC of T (1971) 125 CLR 418.
37
Income Tax Assessment Act 1997 (Cth) s 70-35(2).
38
Ibid s 70-10 1997.
39
Taxation Determination TD 92/126.
31

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REASONS FOR OBJECTION not proceed, the business of trading these subdivisions does not commence and the land cannot be treated as stock – having never been converted.40
In the present case, Tim principal financier withdrew out before any construction of trading stock could take place. The treatment of land in his books from trading stock to an item of capital on
September 2011 after his primary financer withdrew his assistance. His property development business from that point had effectively been terminated. In line with the reasoning given in AGC
(Advances) Ltd v FC of T41 all activities after termination, including the sale of the undeveloped property cannot be included in assessable income.

40
41

Taxation Determination TD 92/126.
75 ATC 4057.

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Bright Ideas Law
MEMORANDUM
To:

Billy Beale, Senior Partner

From:

Ramon Cayamanda

Re:

Tim Button, Objection Matter (FN: LAP/2014-1030)

1.

BACKGROUND

Pursuant to your request this memorandum will discuss the actions that could have been taken by Tim to obtain certainty over his Lutwyche property transaction. It will also consider the likelihood of success for each objection ground made on the client’s behalf, explain the reasons for excluding certain objections and provide advice on the client’s next moves.
2.

LIKELYHOOD SUCCESS OF EACH OBJECTION GROUND

2.1

Overseas salary

The success of this objection hinges on whether Tim is considered an Australian resident. This is a careful game of weighing factors. Tim has a stronger historical association with Australia, in particular his Taringa home, than any other place of residence. His family have also maintained this home as their principal abode for most of their lives. This association began to wane in 2001 when he began to work on overseas projects. A complete change of permanent residence (in the physical sense) occurred in 2007, when he moved to Singapore. It is at this point that Tim can be considered no longer an
Australian resident, for reasons cited earlier. The objection’s greatest threat to success is Tim’s decision to move back to Australia in 2014. While, the 183 day test is easily satisfied, for any reasonable chance of success under the ordinary concept and domicile test, the lack of durability of
Tim’s professional and personal association in Australia, prior to him gaining domestic employment must be emphasised and prevail over intentions.
2.2.

Lutwyche property

Taxation Determination TD 92/126 provides strong grounds in supporting the objection. However, the objection’s main threat to success lies in Tim’s decision to continue with Environmental Planning
Court Proceedings after losing financial support for the venture. This decision may suggest an intention on Tim’s part to continue the business in some capacity and can only be countered if a strict interpretation of trading stock as developed property.

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2.3

Truck clothing and meals

There is a high likelihood of success for clothing based deductions. With regard to meals however,
Tim’s error in using the slightly more expensive 2014/2015 reasonable values as opposed to the earlier
2013/2014 values opened the door for substantiation requirements to operate, exposing the objection to a greater likelihood of failure if the expenses cannot be proved.
3.

OBJECTIONS OMITTED

3.1

Deductions for domestic travel expenses

The Commissioner has refused deductions for travel to and from:


home and work (truck depot); and



home and place of education

believing that all are private in nature.
The cost of travelling between home and work is not usually deductable, being considered a private expense of “getting to work” as opposed to an expense incidental and relevant to income generation.42
A similar conclusion is drawn for travel from home to one’s place of education.43 Deductions for travel to Tim’s truck depot and self-education course relate to journeys to and from home and claims would likely fail.
An exception may have been available for truck depot travel deductions on the grounds that Tim’s needed to carry bulky goods to the work.44 This exception hinges on two factors: whether transporting of the items were necessary or merely convenient45 and whether the items could have been secured at the workplace instead.46
There are limited facts in favour of Tim. The food, water and extra clothing were not a requirement of his employment and were taken as a matter of convenience. There is little connection between the items and income generation. Furthermore, there are limited facts to suggest the depot was not secure.

42

Lunney & Hayley (1959) 100 CLR 478; Taxation Tuling IT 2543; Taxation Determination TD 93/174.
Case R58, 84 ATC 440; Case S25, 85 ATC 263; Case S44, 85 ATC 344.
44
FC of T v. Vogt 75 ATC 4073.
45
Taxation Ruling TR95/18, 139.
46
Case 43/94 94 ATC; AAT Case 9654 (1994) 29 ATR 1031 and Case 59/94 94 ATC 501; AAT Case 9808
(1994) 29 ATR 1232.
43

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3.2

Deductions for accommodation in Australia and Singapore and international travel

With regard to air travel between Australia and Singapore, it may be possible to claim deductions on the grounds that he is a contractor operating from Australia as his base in which work related activities take place.47 However there is little evidence to support any income related activities being performed while in Australia as a ‘base’. Furthermore, work duties officially commenced in Singapore airport and not Australia, as per contractual agreement. As such, it is difficult to suggest that flights to and from Australia were anything more than merely getting to and from work (making them private in nature).48 Similarly there is little evidence to support a connection between an income generating activity and accommodation in Australia and Singapore. None of these expenses were incurred in the course of employment. Rather they were incurred for private benefit; in Singapore it was to spend time with a love interest and in Australia it was incurred to avoid creating personal tensions with his family.
Even if these deductions were considered no considered private in nature, fielding an objective would be counterproductive and contradictory:


a deduction is only available for assessable income, 49 should overseas work pay be excluded from assessment, travel and accommodation attached to it cannot be deducted; and



a deduction for flight expenses and accommodation in Australia may suggest that Australia, as his main ‘base’, is Tim’s main place of residence and would undermine earlier objections to exclude overseas work pay from income assessment.

Ultimately, with no strong grounds, the Commissioner’s decision to deny deductions for all travel and accommodation expenses cannot realistically be objected to.
3.3

Deductions for legal fees associated with Lutwyche property

Deductions claimed must be necessarily incurred for the purposes of gaining/producing assessable income.50 The exclusion of the Lutwyche property sale from assessable income remains a primary objection. Should that objection be successful and the sale proceeds become a non-assessable amount, it will no longer be possible to claim deductions legal fees for the 2014 period. While unfortunate that this $85000 deduction cannot be retained, it is an acceptable trade-off in comparison to potential savings in income tax after the exclusion of a $9 million asset.

47

FC of T v Wiener78 ATC 4008.
Lunney & Hayley (1959) 100 CLR 478; Taxation Tuling IT 2543; Taxation Determination TD 93/174.
49
Income Tax Assessment Act 1936 (Cth) s 8-1(1)(b).
50
Ibid.
48

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4.

NECESSARY STEPS FORWARD

The primary issue in relation to Tim’s property is whether or not the sale was made as trading stock or as a capital gain. Tim could have claimed certainty as to the tax item’s status through a private ruling.
The Commissioner will express their opinion on which the law applies to Tim’s circumstances.51 Tim himself, and agent or a legal personal representative may make an application for a ruling. 52
A person who is dissatisfied with an assessment may make a private ruling to object against it.53
Commissioners may also amend assessments after they made.54 A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953 (Cth).55 There remains a degree of uncertainty over various matters. This includes:


the classification of the Lutwyche property as either trading stock or capital;



the subsequent classification of legal expenditures as deductable items based on whether the property is trading stock or capital; and



the need to substantiate truck meal allowance expenses.

It is recommended that the following be done prior to an objection being made to the Notice of
Amended Assessment dated 30 November 2014 (XXX_24376898/987):


a request be made for a private ruling with regard to the first two matters; and



a request for an amended tax assessment be made to change meal allowance calculations to
2013/2014 values (bypassing substantiation requirements) and amend any other claims affected by the private ruling.

51

Taxation Administration Act 1953 (Cth) Division 359-1 Sch 1.
Ibid.
53
Ibid s 14ZL.
54
Income Tax Assessment Act 1936 (Cth) s 170.
55
Ibid s 175A(1).
52

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