Taxpayer and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/3207-3030)
Judgment date: 27 May 2011
Date published: 22 December 2011

Summary of decision:
This case concerned whether certain expenses incurred in relation to earning personal services income were deductible.

Overview of facts:
1. The applicant is a consultant horticulturist, who provided expert advice to businesses that cultivate different kinds of commercial forest plantations, through a company. | 2. In a previous decision of the Tribunal, it was determined that the income of the company was to be treated as personal services income pursuant to s86-15 of the Income Tax Assessment Act 1997 ("the ITAA 1997") for the 2003, 2004 and 2005 income years. The Tribunal also decided that a penalty was applicable to the amount of the shortfall at the rate of 50% on the basis that there had been recklessness. | 3. Subsequent to that decision the matter was remitted to the Commissioner to ascertain whether any losses or outgoings incurred in the course of earning that income could be deducted pursuant to s86-20 of the ITAA 1997. | 4. The applicant contested the deductions which the Commissioner has disallowed. | 5. The deductions relate to a rural property near Rosebank in New South Wales, on which there is a macadamia nut plantation that generates a crop for sale, and residential accommodation housing an office which the applicant stays at in connection with his work. The property was also used by the applicant to grow a number of trees on an experimental basis to test his ideas. The deductions claimed by the applicant were said to be incurred in conducting tests and maintaining the 'laboratory'. | 6. The Commissioner accepted that some expenses may have been deductible, but many of the claims made were either unrelated to the personal services business or required apportionment, or the claims were inadequately substantiated. It was incumbent upon the applicant to provide a defensible basis for apportionment. | Issues decided by the tribunal | The Tribunal accepted the Commissioner's reliance on s14ZZK of the Taxation Administration Act 1953 such that the taxpayer could not succeed unless it was demonstrated that the assessment was wrong and that an alternative figure or approach was preferable. As the taxpayer maintained an "all or nothing" approach, and that each expense was attributed to the personal services business, the objection decision had to be affirmed unless substantially all of the expenses could be attributed to the personal services income. | The Tribunal found that the applicant was not entitled to claim all of the costs associated with holding and maintaining the farm, given that it was plainly held by the family company for a variety of purposes apart from the consulting business, and the "test crop" of trees grown in connection with the consulting business covered only part of the property. No evidentiary basis for apportioning the expenditure was provided. As the applicant declined to identify alternatives, the Tribunal affirmed the objection decision in relation to each expense not conceded by the Commissioner. Where an expense might have been deductible in part if it were apportioned, this was noted in the decision. | In relation to substantiation, The Tribunal confirmed that in claiming a loss or outgoing as a deduction, it is incumbent to provide evidence establishing that the expenditure was actually incurred, and that it had the requisite connection with gaining or producing the personal services income.

Issues decided:
The Tribunal accepted the Commissioner's reliance on s14ZZK of the Taxation Administration Act 1953 such that the taxpayer could not succeed unless it was demonstrated that the assessment was wrong and that an alternative figure or approach was preferable. As the taxpayer maintained an "all or nothing" approach, and that each expense was attributed to the personal services business, the objection decision had to be affirmed unless substantially all of the expenses could be attributed to the personal services income. The Tribunal found that the applicant was not entitled to claim all of the costs associated with holding and maintaining the farm, given that it was plainly held by the family company for a variety of purposes apart from the consulting business, and the "test crop" of trees grown in connection with the consulting business covered only part of the property. No evidentiary basis for apportioning the expenditure was provided. As the applicant declined to identify alternatives, the Tribunal affirmed the objection decision in relation to each expense not conceded by the Commissioner. Where an expense might have been deductible in part if it were apportioned, this was noted in the decision. In relation to substantiation, The Tribunal confirmed that in claiming a loss or outgoing as a deduction, it is incumbent to provide evidence establishing that the expenditure was actually incurred, and that it had the requisite connection with gaining or producing the personal services income.

ATO view of decision:
The decision confirms that an evidentiary basis for apportionment is required where the deduction relates only in part to personal services income, and the substantiation requirements in relation to deduction claims.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1997 86-15 86-20 Taxation Administration Act 1953 14ZZK
Subject references: Personal services income Personal services entity Deductible expense Apportionment