The impact of this case on ATO policy is discussed in Decision Impact Statement: Sanchez, Carlos (2007/3667 ).
SANCHEZ v FC of TJudges:
RW Dunne SM
Administrative Appeals Tribunal, Adelaide
MEDIA NEUTRAL CITATION:
 AATA 896
RW Dunne (Senior Member)
1. The applicant in this case is Mr Carlos Sanchez. During the 2004/2005 tax year he was a sales consultant in a travel agency and he travelled overseas. He claimed a tax deduction for his overseas travel expenses of $9,985 under s 8-1(1)(a) of the Income Tax Assessment Act 1997 ("ITAA"). The claim was eventually disallowed by the respondent. Mr Sanchez objected, the respondent decided to largely disallow the objection and he has applied to this Tribunal for review of the objection decision.
2. At the hearing, Mr F John Morgan (of counsel) appeared for the applicant and Dr Chris Bleby (of counsel) appeared for the respondent. The T documents and the Supplementary T documents were admitted into evidence (as Exhibit R1 and Exhibit R2), along with the following:
- • applicant's documents, including chronology and witness statements (Exhibit A1);
- • applicant's handwritten diary for 2004 (Exhibit A2);
- • applicant's expanded handwritten notes made in 2007 (Exhibit A3);
- • applicant's handwritten diary for 2005 (Exhibit A4);
- • flyer titled "Profit, Brand and You" (PBY) dated April 2006 (Exhibit A5);
- • Flight Centre advertisement (Exhibit A6); and
- • email to Mr Birdseye from Mr Morgan regarding witness statement of Mr Mussell dated 2 March 2006 (Exhibit R3).
Issues for the Tribunal
3. The following are the issues for the Tribunal:
- • Were the overseas travel expenses of Mr Sanchez in the 2004/2005 tax year incurred in gaining or producing his assessable income, so that they are deductible under s 8-1(1)(a) of the ITAA?
- • Were the overseas travel expenses of a private or domestic nature and, as such, precluded as a deduction under s 8-1(2)(b) of the ITAA?
- • If the overseas travel expenses incurred by Mr Sanchez are deductible under s 8-1(1)(a), has he obtained and retained written evidence of the expenditure under s 900-15 and s 900-115 and has he kept travel records under s 900-20 and s 900-150?
- • If Mr Sanchez has not obtained and retained written evidence of the expenditure and kept travel records, should the discretion under s 900-195 be exercised by the Tribunal to allow the deduction claimed?
The Tribunal notes that, under s 14ZZK of the Taxation Administration Act 1953, the onus is on the applicant to establish that the relevant assessment (or amended assessment) is excessive.
4. The provisions of the ITAA that are presently relevant are as follows:
- "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.
- 900-15 Getting written evidence
- (1) To deduct a *work expense:
- (a) it must qualify as a deduction under some provision of this Act outside this Division; and
- (b) you need to substantiate it by getting written evidence.
Subdivision 900-E tells you about the evidence you need.
- 900-20 Keeping travel records
You need to keep travel records if your expense is for travel that involves you being away from your ordinary residence for 6 or more nights in a row.
The travel may be within or outside Australia. Subdivision 900-F tells you about travel records.
- 900-195 Commissioner's discretion to review failure to substantiate
Not doing something necessary to follow the rules in this Division does not affect your right to a deduction if the nature and quality of the evidence you have to substantiate your claim satisfies the Commissioner:
- (a) that you incurred the expense; and
- (b) that you are entitled to deduct the amount you claim."
It was my understanding it was common ground that s 8-1(1)(b), relating to the carrying on of a business, had no application to the applicant's claim for deduction.
5. Mr Sanchez commenced working as a sales consultant for the travel agency, Flight Centre, in September 2003. He was subsequently approached by STA Travel ("STA") and commenced working there as a travel agent in January 2004. He worked for STA for about 3½ years. On its website, STA describes itself as "the world's leader in student and youth travel, with a global network of over 450 branches worldwide". It has as its motto, "We know because we go", which also appears on its website.
6. While working for STA he travelled on 7 occasions. Particulars of this travel are set out in the Table below. The travel arrangements were described as either "supplier-structured" or "self-structured". In broad terms, "supplier-structured" involved travel where the itinerary was structured by the supplier of the travel product. With "self-structured" travel, he structured the itinerary himself. In the case of supplier-structured arrangements, the travel costs were borne by the supplier. The only cost to Mr Sanchez was a participation fee and his own personal expenses. In the case of self-structured arrangements, he paid for all his travel costs, including fares and accommodation and travelled whilst on annual leave. In addition to 4 weeks annual leave, he was eligible for 5 days paid "educational leave" each year. He used his educational leave for his supplier-structured travel.
|May 2004||Bali||1 week||Educational (& weekend)||Supplier-structured|
|August 2004||Round the World||3 weeks||Annual leave||Self-structured|
|May 2005||Northern Territory||1 week||Educational (& weekend)||Supplier-structured|
|June & July 2005||USA (& Gold Coast||3 weeks||Annual leave||Self-structured|
|December 2005||Thailand||1 week||Educational (& weekend)||Supplier-structured|
|June 2006||USA & Germany||3 weeks||Annual leave||Self-structured|
|March 2007||South America||2 weeks||Educational & Annual leave||Supplier-structured|
7. During the 2004/2005 tax year, Mr Sanchez undertook travel on three occasions (the "2005 trips"), namely:
- (a) a round the world trip, from 4 to 24 August 2004, visiting mainly New York, Germany and Spain (the "RTW trip");
- (b) a trip to the Northern Territory from 3 to 9 May 2005 (the "NT trip"); and
- (c) a trip to the United States of America (with a domestic leg to the Gold Coast) from 25 June to 14 July 2005 (the "USA trip").
8. In his 2004/2005 personal tax return he claimed a deduction for $9,985 in respect of expenditure incurred on the 2005 trips. The deduction claimed was said to comprise actual travel expenses of $8,480 and an estimate of food and incidentals (at $50 per day) of $1,505. Based on his tax return, an assessment for the 2004/2005 year issued on 4 October 2005 allowing the deduction claimed. In July 2006, the respondent commenced an audit of his 2004/2005 return and the deduction claimed for the expenditure incurred on the 2005 trips. At the conclusion of the audit, the claim for overseas travel expenditure was disallowed and an amended assessment issued on 5 March 2007. Mr Sanchez objected against the amended assessment and, apart from a participation fee of $132 in respect of the NT trip, the objection was disallowed in full.
9. Before the Tribunal, he adjusted his claim for deduction for expenditure incurred on the 2005 trips to $10,289.92. Of this amount, the respondent has accepted that $7,558.68 was incurred by Mr Sanchez in the 2004/2005 year for airfares, accommodation and tours on the 2005 trips and has written evidence to substantiate this expenditure. The following is a summary of the adjusted claim for expenditure, with details of the amounts that the respondent has accepted as being incurred in the 2004/2005 year:
|Round the World Trip (4-24 August 2004)|
|- Flights and accommodation (paid in Aust.)||$5,500.00||$5,500.00|
|- Tour in New York||$103.10||$103.10|
|- Accommodation in Gijon, Spain||$889.16|
|- Food and incidentals||$1,604.33|
|Northern Territory Trip (3-9 May 2005)|
|- Participation fee||$132.00||$132.00|
|- Food and incidentals||$21.50|
|USA Trip plus Brisbane/Gold Coast leg (25 June to 14 July 2005)|
|- Brisbane accommodation||$187.23||$187.23|
|- Flights between Sydney & USA||$833.42||$833.42|
|- Flights within USA||$802.93||$802.93|
|- Food and incidentals||$216.25|
10. Mr Sanchez's remuneration for each of the 3 (full) financial years when he worked for STA can be summarised as follows:
|Fixed (Base) Wage||$23,000|
|2004 Calendar Year Bonus *||$1,000|
|* As the applicant exceeded an annual yield target of $80,000 in the 2004 calendar year, he received a "Productivity Bonus" of $1,000 in the 2004/2005 financial year.|
|Fixed (Base) Wage||$25,500|
|2005 Calendar Year Bonus **||$2,500|
|** As the applicant exceeded an annual yield target of $100,000 in the 2005 calendar year, he received a "Productivity Bonus" of $2,500 in the 2005/2006 financial year.|
|Fixed (Base) Wage||$28,000|
|2006 Calendar Year Bonus ***||$3,500|
|*** As the applicant exceeded an annual yield target of $100,000 in the 2006 calendar year, he received a "Productivity Bonus" of $2,500, together with a "Productivity Top-up Bonus" of $1,000, based on 2½ years of service and the 2006 productivity, in the 2006/2007 financial year.|
11. For the RTW trip and the USA trip Mr Sanchez maintained a diary that he took with him in which he made contemporaneous entries relating to his travel. In 2007 and in response to the audit, for the RTW trip, he prepared more detailed hand-written notes that were based on his contemporaneous diary entries and also from his recollection. Later, he added columns for dates, times and approximate expenditures. Then, his tax agent typed up his detailed hand-written notes, with the columns for dates and expenditures. For the USA trip, more detailed notes were typed by him into an email to his tax agent, who converted the information into a spreadsheet, with columns for the dates and expenditures. Again, the notes were based on the applicant's contemporaneous diary entries and his recollection.
Evidence of the Applicant
12. Mr Sanchez's evidence was that, on each of the 2005 trips, he undertook holiday activities, as he was employed to sell holiday related travel products, and his employer's business model emphasised "excellence of service to its customers based on the sales consultant having personal experience of the products they are selling". In his witness statement he opined that, to survive in the travel industry, "you have to be passionate about travel", which he said he was, and "you have to travel at every available opportunity", which he said he did. A substantial part of the expense of both the RTW trip and the USA trip was invoiced and pre-paid in Australia, typically for his airfares, accommodation and some tours. For the RTW trip, he took foreign currency funds that cost him about $4,000 to purchase. He only claimed (and says he is still only claiming) less than half this amount as an allowable deduction. The balance of the funds he said he spent on clothes, music, personal effects or events that he considered were private or where the funds were not related to earning his assessable income. The amount claimed was $1,604.33 and appears as a separate item in the summary in paragraph 9 above. In relation to the USA trip, he took foreign currency costing about $2,800 to purchase. In addition, he purchased currency in the United States costing $1,219.29. Of this total, an amount of $1,439.59 has been (and he says will be) claimed as a deduction in respect of overseas travel. Of this amount, $1,223.34 relates to expenditure incurred in the 2005/2006 tax year, leaving a balance of $216.25 claimed in the 2004/2005 year.
13. He said that the chief reason for taking the RTW trip and planning the itinerary that he did was to learn first hand about the things that were necessary for him to excel at his work with STA. He referred to a list of the top yielding STA sales consultants in Adelaide, between January and March 2005 (Exhibit A1 at page 248C). His name was at the top of the list, only 4-6 months after the RTW trip and after having worked for STA for only a year. He said he had to travel in his own time because the 5 days educational leave he was given was not enough. Although its commitment did not extend to giving travel consultants more that 5 days educational leave (with some exceptions), STA wanted sales consultants to travel more than 5 days each year. However, in cross-examination, he acknowledged that nowhere in its documentation did STA say this. STA also gave sales consultants access to travel discounts that could be taken at any time, and the particular manager of his branch at the time gave consultants "explicit" encouragement to travel in their own time in a way that would help the branch meet its targets. When asked about the consequences of not travelling, if yields were not maintained, the manager had said that consultants could be warned and their employment terminated. The manager expected consultants to file "educational reports" for travel taken in their own time, which Mr Sanchez did for the RTW trip (Exhibit A1 at pages 49-52). He also expected consultants to give oral reports to work colleagues in monthly morning "Toolbox" meetings about travel taken in their own time. Mr Sanchez did this for the RTW trip. When cross-examined, he said it was his understanding that both educational reports and reports to Toolbox meetings were mandatory. When it was suggested that it was not something he should have to do because he was on holidays, he said he did not see the RTW trip and the USA trip as holidays. He saw the reports and the Toolbox meetings as educational and the trips as activities that would benefit himself and the rest of his branch.
14. Mr Sanchez's primary objective (so he said) for taking the particular flights and destinations that he did on the RTW trip was to use, and learn better how to use, a particular round the world flight that Qantas offered STA exclusively. By using the ticket himself, he came to understand its benefits and how to make the ticket "work for customers much better". Prior to taking the RTW trip, he said that he had sold perhaps two or three of these tickets. After travelling on the ticket himself and having the knowledge and confidence to recommend it, he said he "sold literally hundreds of them". The tickets were important from his perspective, not only because of the volume that he could sell, but also because of the price, which allowed higher than normal yields to STA and good bonuses to him. Using the RTW ticket, he chose to travel to New York, which he described as "a huge and complex city with many vastly different precincts which you just have to know about to match the needs of particular customers". In travelling east around the world to New York, he said he had to continue in that direction and decided to see something of Germany, including Frankfurt, and then by train to Berlin. From Frankfurt he chose to fly to Spain and the city of Gijon, where his extended family lived. He conceded that he took a girlfriend with him on the trip. However, he said she paid her own way and "did her own thing" on many days.
15. His reasons for travelling on the USA trip were the same as those for the RTW trip-to gain and update his knowledge as a travel consultant. There was not enough educational leave given or supplier-structured trips offered. STA wanted him to travel in his own time, to his own destinations and at his own expense, and "encouragement" was provided to him to do so. He chose the destinations and the itinerary for the USA trip because he was able to obtain a good return airfare to America from a travel agent called, "Breakaway". Breakaway catered only for those in the travel industry and was not available to the general public. As an important tourist destination and as he had already visited New York, he said he needed to know more about America. In addition to Los Angeles, San Francisco, Santa Monica, Santa Barbara, Hollywood, Las Vegas and San Diego, he visited Columbus, Ohio, where he had a friend who could show him around the city and some of the "Mid-West". Columbus was the home of a significant American university (Ohio State University) which was likely to be of interest to the student and academic customers on which STA concentrated. The Mid-West was different to New York and Los Angeles and he wanted to get a taste of a different city. The fact that Ohio State University was there was a bonus. He believed Columbus, as a city, would be cheap to customers who were students. He also visited Dennison University, about 50 kilometres from Columbus. The result was that he took the Breakaway return fare to the United States and largely divided his itinerary between Ohio and California, in that order. Then, on to the front of his itinerary for the USA trip, he added a short leg to Brisbane and the Gold Coast, using domestic Frequent Flyer points. These destinations were frequently requested by customers, he had never been to them and he lacked the confidence to make recommendations for the destinations.
16. Mr Sanchez referred to his duties as set out in the STA Travel memo (Exhibit A1 at page 70). The duties included "Exceed monthly yield targets given to you" and "Adherence to Travel Planner system". He was entitled to staff travel benefits (Exhibit A1 at page 72), which meant he was entitled to travel at wholesale prices for any purpose. There had been a change in the STA remuneration system at the end of the 2005 calendar year. The change was outlined in his witness statement (Exhibit A1 at pages 321-322) and, in part, is repeated below:
"Prior to 1 January 2006, I was paid a fixed amount or retainer of $23,000 per annum plus monthly and annual bonuses based broadly on the gross profit or yield I achieved from my sales for STA Travel.
From 1 January 2006 however, the system changed to...one..., which is so complex that I must confess to never having understood it completely. So far as I was concerned, the important things were these. The fixed component increased to $28,000 but the bonuses then depended on exceeding certain monthly and annual yield (or gross profit) targets from your sales-and these amounts were not fixed each month but varied. I knew what my target was and I knew what each of my sales yielded and how to maximise this."
When cross-examined as to whether he thought attributing all of the increase in yield and bonuses to the RTW trip and the USA trip was an exaggeration, Mr Sanchez was in no doubt that the majority of the increase could be attributed to those trips. He explained the "yield" (or gross profit) that one of his sales could produce. The table below sets out the yields that typically applied in a product sale at STA:
|Component of Travel Service||Retail||Discount (%)||Yield|
|Accommodation ($150/night × 10)||$1,500||10%||$150|
|Tour (10 days)||$1,500||20%||$300|
Evidence of Mr Richard Mussell
17. Mr Mussell described himself as the Chief Executive Officer for the Youth Hostels Association of South Australia. His witness statement indicated that he had been continuously employed in travel and tourism in both Australia and the United Kingdom for 22 years. As Chief Executive Officer, he was responsible for the travel agency that the Youth Hostels Association ran. He had previously been State Manager of Consolidated Travel Pty Ltd, which was a privately owned company that operated the national ticket centre for Jetset Travel World. From the 8 years spent with Consolidated Travel, his view was that the job of an Australian travel consultant was extremely demanding and their success, due to an ever changing industry, required constant product training. Part of his role was to train travel consultants in how to locate, understand and sell international airfares. In his opinion, a person who sold travel was selling their own knowledge about that travel. The components of that knowledge included information gained from others, from selling products, from marketing material and, most importantly, from one's own travel experience. A travel consultant's knowledge from a flight, hotel stay or destination, would be used in the process of selling the same product to customers and contributed to their earning ability and career potential. The most common question a travel consultant received was "have you been there?". A reply in the affirmative would almost certainly secure the sale. When questioned about the different levels of experience and knowledge of travel consultants in Australia, he said his views were largely limited to domestic and international airfares as part of the overall travel package. He had no dealings with travel agents as far as other products were concerned. However, the process of selling airfares was complex and knowing the fare and the components of the fare were one aspect of the process. The other aspect was actually experiencing the different products themselves. When questioned about the opinions he had expressed in his witness statement, he admitted that his statements were generally impressionistic. They were not a result of any inquiry or analysis and, in some cases, were general observations.
Were the overseas travel expenses of Mr Sanchez incurred in gaining or producing his assessable income?
18. The starting point in considering the deductibility of a loss or outgoing incurred in gaining or producing assessable income is the decision of the High Court in
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47. Although the High Court was dealing with s 51(1) of the Income Tax Assessment Act 1936, its decision is relevantly applicable to s 8-1(1)(a) of the ITAA. To be deductible under s 8-1(1)(a) a loss or outgoing must be "incidental and relevant" to gaining or producing assessable income. The words "incurred in gaining or producing your assessable income" mean "in the course of gaining or producing" such income. Moreover, to come within s 8-1(1)(a) "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".
19. In dealing with the deductibility of overseas travel expenses specifically, it is first necessary to have regard to the decision of the High Court in
Commissioner of Taxation v Finn (1961) 106 CLR 60. In Finn, the overseas travel expenses were held to be deductible because, on the facts of the case, the expenses were sufficiently connected and relevant to the income-producing activities of an employed senior design architect with the Western Australian Government.
20. In the written submissions, the respondent referred me to the following observations by Dixon CJ in Finn (at pages 67-68):
" ... three or four conclusions may be drawn which perhaps may be considered to govern the question whether the expenditure was incurred in gaining or producing the assessable income. In the first place it seems indisputable that the increased knowledge the taxpayer sought and obtained of his subject and the closer and more realistic acquaintance he secured of modern developments in design and construction made his advancement in the service more certain, and that in respect of promotion to a higher grade these things might prove decisive ... In the second place, so far as notice or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. In the third place it is apparent that the heads of his Department, and indeed the Government itself, treated the use which he made of his long service and other leave to study architecture, increase his professional knowledge and study modern trends, as a matter not only of distinct advantage to his work for the State but of real importance in at least one project in hand. In the fourth place it was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service ...
When the foregoing elements are considered in conjunction, they do seem to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income. ..."
21. I was also referred to the observations of Kitto J (at page 69) regarding the execution of Mr Finn's duties of office, where the learned Judge said:
"Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add ... to his knowledge and understanding of architectural achievements and trends overseas ..."
And Windeyer J was of a similar view to Kitto J, when he stated (at page 70):
"... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling."
22. Menzies J subsequently considered Finn in Federal
Commissioner of Taxation v Hatchett 71 ATC 4184; (1971) 125 CLR 494, which involved an employee school teacher's claim for self-education expenses. Menzies J allowed a deduction for outgoings incurred by the taxpayer in obtaining a Teacher's Higher Certificate, but disallowed a claim for the payment of university fees in respect of a course undertaken with the employer's encouragement. He stated (at page 499):
"... Enlightened employers often encourage employees to improve their bodies and their minds, and assist them to do so. Such encouragement is not, of itself, enough to warrant the deduction of outgoings for these purposes. The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income?
As I have said, I am not able to find any connexion between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department. In my opinion this general consideration is not enough to make the fees deductible; there must be a perceived connexion between the outgoing and assessable income. ..."
23. The respondent then referred me to the decision of the Supreme Court of New South Wales in
Griffin v Federal Commissioner of Taxation 86 ATC 4838; (1986) 18 ATR 23. Griffin involved a professional electrical engineer employed by the State Rail Authority of New South Wales. He claimed overseas travel expenses in respect of a trip he undertook, using his own initiative and entitlement to long service leave and annual leave, to inspect and familiarise himself with railway electrification systems in Europe. Although the taxpayer's overseas trip did not include a planned itinerary, was not a condition of service by his employer, and did not directly result in any promotion of the taxpayer, Yeldham J considered that the travel expenses incurred were deductible. He stated (at page 31):
"... notwithstanding that no question of promotion is relied upon, the case falls within sec. 51, the deductions claimed being outgoings incurred in producing the assessable income of the appellant, and they were not of a capital, private or domestic nature. In this respect I rely in particular upon the judgment of Kitto J. in Finn's case. I regard the activities of the appellant whilst overseas as being closely related to the proper carrying out of his duties as a professional engineer. Plainly he travelled abroad for the purpose of widening his knowledge and making himself familiar at first hand with the developments in overseas railway electrical systems. In doing so he better equipped himself to carry on as a professional engineer employed by the State Rail Authority. In order to keep up and advance his status and standing as a professional electrical engineer he was obliged to keep abreast of developments in railway electrical engineering, whether at home or overseas. His visit was designed to ensure, as best he could, that he brought the highest degree of professional skill to the carrying out of his task."
24. Yeldham J added (at page 32):
"As Kitto J. observed in Finn's case his professional status implied an obligation of progressive acquaintance with a living and developing body of knowledge, and it was plainly incidental to his employment as a professional engineer that he should avail himself of such opportunities as might arise to add, in the interests of his employer, even if also in his own interests, to his knowledge and understanding of matters such as those which the appellant investigated overseas, this all being work which from time to time he could use to advantage in the practice of his profession in the employment of the S.R.A."
25. The respondent accepted that Mr Sanchez was entitled to a deduction for dinner expenses of $21.50 incurred on the Northern Territory trip. However, having referred to the above authorities, the respondent contended that, based on the facts and evidence before the Tribunal, he was not entitled to a deduction for his overseas travel expenses. Put simply, the expenses were not incurred in gaining or producing his assessable income as a travel agent at STA and were a loss or outgoing of a private nature. Although the respondent believed Mr Sanchez sought to rely heavily on Finn, it was contended that, for the following significant reasons, such an analogy could not be drawn:
- (a) The purpose of the tour in Finn was for the architect taxpayer to bring himself up-to-date with current trends in architecture and to better his prospects of promotion.
- (b) Mr Finn devoted all of his available time to the advancement of his knowledge of architecture and the development of his architectural equipment, knowledge and skill. This included studying architecture and conferring with leading architects in the cities he visited, as well as taking voluminous notes, numbers of photographs, making many sketches, writing up reports and records and collecting a great deal of reference material.
- (c) Mr Finn "carefully planned an itinerary for architectural inspection and study".
26. The respondent conceded that Mr Sanchez was "passionate about travel" and that the experience he gained on his overseas trips would likely have benefitted him to some extent in his occupation as a travel agent. However, it was submitted that the overseas trips undertaken in the present case were of a substantially different character to the architect's trip in Finn. The trips undertaken by Mr Sanchez were holidays. While overseas, he did not visit a single travel agency to see how they did business. "Product sampling" of a holiday may provide knowledge useful to employment within the travel agency industry, but this did not equate it with the sort of trip that was involved in Finn. Much of the evidence of Mr Sanchez was unsubstantiated opinion and was characterised by heavy exaggeration.
27. In my view, although the nature of the trips undertaken by Mr Sanchez were different to that of the architect in Finn, they were not irrelevant or unconnected to the derivation of his assessable income. Mr Sanchez was a travel agent and the 2005 trips clearly assisted him in that occupation. On the evidence, I am satisfied that the trips were not simply holidays. Although it appears he did not visit any travel agencies to see how they did business, he was a sales consultant employed to sell holiday related travel products. He did not run a travel agency business and there would have been no relevant reason, while on the trips, for him to see how such businesses were conducted. I am also satisfied, on the evidence, that Mr Sanchez's calling as a sales consultant required degrees of knowledge and skill that benefitted from personal experience of the travel components he sold to his customers.
28. Mr Sanchez was prepared to develop his travel experience by committing his own time and money to the task and, although challenged by the respondent, his increasing remuneration from STA reflected this commitment. For the respondent, it was submitted that the increases in remuneration from 2004 to 2006 were attributable to increases in base salary each year, and not to increases in commissions. It is true that the base salary increased by $2,500 each year from $23,000 in 2004/2005 to $28,000 in 2006/2007. At the same time, commissions fell from $14,922 to $11,853. However, productivity bonuses totalling $7,000, based on annual yield targets being exceeded, were also received. Moreover, the evidence of Mr Sanchez, which I accept, was that the remuneration structure changed from 1 January 2006-STA increased the base salary and decreased commissions (Exhibit R1, pages 70-72). It became harder to earn commissions, but his remuneration increased overall each year. This was largely because of the receipt of bonuses, based on performance or productivity. In any event, as was said by Hill J in Studdert (infra), for a loss or outgoing to be deductible under s 8-1(1) of the ITAA, it is not necessary to show that the outgoing will, on the balance of probabilities, produce an increase in assessable income in the future.
29. Although it was not a requirement of STA that he undertake the RTW trip and the USA trip, Mr Sanchez planned the itinerary himself, paid for the trips himself and took them in his own time, on annual leave. His evidence was that he was encouraged to travel by his branch manager and became aware, through his manager at the time, of an "unwritten policy" which was to the effect that "to keep your knowledge up, it's best to continue travelling". I am satisfied that such "encouragement" to travel would have been given, directly or indirectly, to Mr Sanchez. This appears evident from the STA website itself (Exhibit A1, page 280 and Exhibit R2, page 117), where it is stated:
"You have probably seen our motto 'We know because we go'. To honour that motto with our customers it is essential that you have a wealth of personal international travel experience. Generally we would expect that you have travelled through at least two continents (excluding Australia). Previous experience in the Travel and Tourism industry and/or a qualification in Travel and Tourism is also a bonus.
Our travellers love us because we are people just like them. We listen and we understand what they want. And we never forget the excitement, adventure, surprise and thrill of travel. Our team has been, seen and experienced, and they're advising from personal knowledge."
30. The respondent was critical of the motives given by Mr Sanchez for the RTW trip and the USA trip, of the destinations to which he travelled on the trips and the extent of the contemporaneous diary notes recorded on the trips. I am satisfied that the motives or reasons for the trips were to gain and update the knowledge and skills he needed as a sales consultant in order to improve his work performance and his productivity. For the most part, his planned itineraries on the trips were designed to achieve these ends. On the USA trip, although there were some unplanned travel diversions, Mr Sanchez's evidence was that he found he was able to visit places of tourist potential and gain knowledge that he could use and pass on to customers. Although his contemporaneous diary notes for both the overseas trips were not extensive, he explained that time constraints prevented him from recording information "24 hours a day". However, the contemporaneous notes enabled him to later prepare the more detailed notes of his activities. Although much of these detailed notes, which the respondent accepted were "honest", would have come from recollection, they would have been based on actual happenings or events on the trips and would not have been simply figments of Mr Sanchez's imagination. In respect of the RTW trip, the respondent was also critical of the 3 days when he visited his extended family in Gijon. It was contended that the time spent in Gijon spoke very strongly of the Spanish leg being a holiday. Mr Sanchez conceded that he planned the Spanish leg, in part, around seeing his extended family. However, he only stayed there 3 days out of the 20 days he was away and in a hotel in Gijon, not with his extended family. His evidence, which I accept, was that he was in Spain for 7 days and used the balance of the time to travel and visit parts of Spain he had not been to before, including Barcelona. Again, this was a destination that, he said, he was able to recommend to customers after experiencing it himself.
31. In relation to the evidence of Mr Richard Mussell, I am able to deal with it briefly. I accept the respondent's submission that it does little to assist the Tribunal. It was largely confined to Mr Mussell's experience in the airfare industry and to the selling of airfares. As Mr Mussell admitted, his evidence was merely impressionistic from his dealings with travel agents.
32. I have already outlined the respondent's main contention that the overseas travel expenses of Mr Sanchez were not incurred in gaining or producing his assessable income as a travel agent at STA. Specifically, the respondent contended that the applicant's travel-related personal experience was no more that a useful aspect to his role as a travel agent, the discharge of which role required various skills. His travels provided him with experiences to draw on. However, he would travel in any event, and this was an entirely different case from Finn (supra), where Mr Finn used his entire available time, as the respondent contended, to "great, recorded effect". Ultimately, the applicant failed to demonstrate that his travel was anything other than a neutral factor in the obtaining of his remuneration. I am unable to accept that the facts or the evidence in this case support the respondent's contentions. As has been said many times before, each case must be considered on its own particular facts and, in the case of Mr Sanchez, I am satisfied on the evidence that the overseas travel expenses claimed by him not only directly contributed to his knowledge and skill as a travel sales consultant, but also contributed (or were likely to contribute) to him earning increased income.
33. As the respondent acknowledged, Mr Sanchez was passionate about travel. But the RTW trip and the USA trip were more than holidays. He was a successful travel agent and was obviously motivated in planning and undertaking the 2005 trips. In particular, in planning the USA trip, he would no doubt have been motivated by the fact that, for the quarter from January to March 2005, as an STA sales consultant, he had the highest "yield" for the whole of Adelaide. It is true that the expenditure of Mr Sanchez on the overseas trips was on activities that were of a "holiday" nature. However, he was employed as a sales consultant for a travel agency and, in that capacity, there would be a functional relationship between the knowledge gained from his travel and the means by which he earned his assessable income. Owen J, in the High Court, made this point in
Paramac Printing Co Pty Ltd v Commissioner of Taxation (1964) 111 CLR 529. Paramac was about whether a marketing company could claim tax deductions, under the pre-cursor to s 8-1(1), for the cost of sending its "creative thinkers" on trips overseas to better their knowledge of the printing trade. Owen J allowed the deductions and said (at page 537-538):
"...On the whole I think Mrs. McWilliam's and Jan's journeyings should also be so regarded. They were members of the team of "creative thinkers" and to have had the opportunity of seeing for themselves what was being done overseas in the advertising and printing world would and did, I think, advance their own techniques, widen their minds and give them new ideas which would be of real benefit to them and to the business in which they were engaged. In this respect the case bears a considerable resemblance to that of
Commissioner of Taxation v. Finn  HCA 61; (1961) 106 CLR 60. It is not, I think, to the point to say of such persons that visiting overseas art galleries and exhibitions, and I give this as only one example of their activities abroad, is a usual tourist activity and that the expense incurred cannot therefore be treated as a deduction for income tax purposes whether the claim for a deduction be made by the individual concerned, as in Finn's Case  HCA 61; (1961) 106 CLR 60, or by those who employ him to use his artistic and creative abilities. " (emphasis added)
34. One of the key cases on the deductibility of self education expenses and overseas travel expenses is the decision of Hill J in
Commissioner of Taxation v Studdert 91 ATC 5006; (1991) 33 FCR 75. Studdert was an appeal from a decision of Deputy President Bannon QC (reported as 91 ATC 2007). Mr Studdert was a flight engineer employed by Qantas Airways Limited in Boeing 747 aeroplanes. These planes carry a flight engineer to supervise and regulate the delivery of power to the aeroplane from jet engines. The duties of a flight engineer are detailed in the Qantas Flight Operations Policy and Administration Manual. Mr Studdert expended money on flying lessons and claimed a deduction for the money in determining his taxable income. Deputy President Bannon found as a fact that his lessons assisted him in carrying out the duties enumerated in the Manual. He said (at page 2008):
"I accept the applicant's evidence on this point. Having regard to the close consultation needed between the officers and engineer in bringing these complex machines with their passengers in safety from one place to another, and the desirability of the engineer understanding not only the mechanism of power delivery, but also the intricacies of take off and landing of these aeroplanes, it seems to me to be a matter of commonsense that the engineer understands not only his own duties as to delivery of power, but also the interrelated combination of factors relating to the duties of the pilot which lead to the successful take off and landing of the flying machines of Australia's international carrier."
There was no challenge to the above finding. Importantly, Deputy President Bannon also found that there was a connection between the money expended on the flying lessons and the gaining of Mr Studdert's income. He went on to say (at page 2009):
"... I prefer to rest my decision upon the uncontradicted evidence of the applicant that his flying lessons improved his proficiency as a Flight Engineer."
35. On appeal, Hill J held that the facts on their own, without reference to the effect of the flying lessons on his promotions, were sufficient for the Tribunal to conclude that the outgoing for the lessons had the necessary connection with the gaining or production of Mr Studdert's assessable income. In so holding, Hill J said (at pages 83-84):
"To fall within s.51(1) it is not necessary to show that a particular outgoing will, on the balance of probabilities, produce an increase in assessable income in the future. So much was decided by the High Court in
Federal Commissioner of Taxation v Smith  HCA 10; (1980-1) 147 CLR 578, where the payment of a premium by an employee on a loss of income policy was held deductible, irrespective of the fact that no income might ever be derived under the policy, and indeed, where presumably the employee might have desired that no income be derived under the policy. See too
Federal Commissioner of Taxation v Cooper (supra) at 197. As I said in the latter case, the true principle is that enshrined in the famous passage from the decision of the High Court in
Ronpibon Tin NL v Federal Commissioner of Taxation  HCA 15; (1949) 78 CLR 47 at 57:
'In brief substance, to come within the initial part of the sub-section 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.'
In its reformulated form in later cases, eg Smith, the principle has been expressed as follows:
'What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character, and generally to its connexion with the operations which more directly gain or produce the assessable income.'
Where an outgoing is shown to contribute or to be likely to contribute to increased income, it will normally be the case that the necessary connection will exist between the outgoing and the activities of the taxpayer which more directly contribute to the gaining or production of assessable income. Cooper is perhaps, on one view, an illustration of an exception to this general rule. However, it is not necessary for an outgoing to be deductible that a taxpayer be able to show a likelihood of increased income. In the present context, were this to be so, it would mean that a person who had reached the peak of his income-producing position, would never be entitled to a deduction for self-education expenses. Thus, the Commissioner of Taxation, having no public service office to which he could ordinarily expect to be promoted, could never obtain a deduction for a course of instruction that could be shown to better equip him in the performance of his duties as Commissioner. So to state the problem is to expose the fallacy in the argument. If the Commissioner were to undertake a course which would be objectively seen as improving or tending to improve his proficiency in his office, that would better equip him so to do, there is no reason to suppose that a deduction would not be allowable for expenditure which he incurred on such a course. There would be a relevant (or to use the words of Menzies J in Hatchett a perceived) connection between the outgoing and the activities of his office which more directly produce his assessable income (ie his statutory remuneration)."
36. Hill J also referred to the decision in
Commissioner of Taxation v Wilkinson 83 ATC 4295; (1983) 68 FLR 121, which involved an air traffic controller employed by the Department of Aviation. A deduction had been claimed for the cost of taking flying lessons. Flying experience was not a pre-requisite for the job, nor was it a pre-requisite for promotion. Nevertheless, it was found that the taking of lessons would make it inherently likely that Mr Wilkinson would be promoted and thereby earn a higher salary. It was held that these matters in combination provided a foundation for the conclusion that the expenditure was incurred in gaining Mr Wilkinson's assessable income. It was also held that an air traffic controller, like the architect in Finn, had a duty to keep his knowledge and training as up-to-date as possible, suggesting that the remarks of the High Court in Finn were not limited to traditional professionals, but applied to all those whose occupations depended on improving or maintaining skill and knowledge. Hill J said further (at page 86):
"Although the two matters of promotion and efficiency were both present in that case and in combination enabled his Honour to reach the factual conclusion that he did, it does not follow from this that a factual finding that undertaking the course better equipped the taxpayer to perform his job was not, of itself, sufficient to enable a conclusion in favour of deductibility to be reached in that case. Particularly so, where, as here, it was also found as a fact that a motivation for undertaking the course was the gaining of that proficiency."
37. It was the strong contention on behalf of Mr Sanchez that, on the authority of Studdert, increased proficiency in a taxpayer's current job was enough on its own to allow a deduction for self-education expenses or overseas travel expenses. Put another way, education (by developing knowledge and skill) that improves an employee's proficiency in his or her current employment will satisfy the relevant income nexus test referred to by Hill J (when citing Ronpibon Tin (supra) and Smith (infra)). I am unable to accept that increased proficiency in a taxpayer's current employment is sufficient, of itself, to establish the requisite nexus between the relevant expenditure and the income earning activities, so as to make the expenditure deductible. In the Tribunal in Studdert, Deputy President Bannon found that the flying lessons assisted Mr Studdert in carrying out his duties. In making this finding, the Deputy President was able to conclude that this alone established a sufficient connection between the expenditure and the gaining of his assessable income. In the present case, it is the respondent's contention that the overseas travel experience of Mr Sanchez may only assist in improving his general skills and his general knowledge about travel. However, this general benefit or improvement is different to the improved proficiency in undertaking duties that required specific skills or knowledge the Tribunal was concerned with in Studdert. As already indicated, I am satisfied that the improved proficiency Mr Sanchez gained from the skills and knowledge developed from his overseas travel experience has enabled me to conclude that the requisite nexus exists between the overseas travel expenses and the derivation of his income.
38. Arising out of matters put by the respondent, a further comment on the application of Finn (supra) to the present case is warranted. In Finn, Kitto J was satisfied that Mr Finn's professional status "implied an obligation of progressive acquaintance with a living and developing art" and was, therefore, "incidentally to the proper execution of his office". Windeyer J expressed his reasons more broadly, saying that maintaining knowledge was incidental to deriving income for anyone who gained their income "by the exercise of his skill in some profession or calling". By inference, the respondent contended that Mr Sanchez's work did not create the same demand on him as on the architect in Finn and the engineer in Griffin (supra). In my view, the reference by Windeyer J to the exercise of skill in some "profession or calling" contemplates that his reasoning applies to taxpayers other than traditional "professionals" and extends to occupations where income is derived "by exercise of some skill" that involves "learning, knowledge, experience and ability" that might need maintaining or upgrading. Moreover, cases have occurred where persons other than traditional professionals have been able to establish deductions for self-education expenses and overseas travel expenses, such as taxation officers (
Commissioner of Taxation v Smith 78 ATC 4157; (1978) 36 FLR 95 and
Commissioner of Taxation v Lacelles-Smith 78 ATC 4162; (1978) 8 ATR 524), an air traffic controller (Wilkinson (supra)), a flight engineer (Studdert) and a teacher (
Re Lenten and Commissioner of Taxation 2008 ATC ¶10-017;  AATA 281). However, these cases must be compared with the decision of the Tribunal in
Re Blackford and Commissioner of Taxation  AATA 611, where a senior travel consultant employed by a travel agency was denied a deduction for certain of her overseas travel expenses. In Blackford, it was in my view of importance that, based on the facts of the case, Senior Member J Block (as he then was) did not consider that the particular employment of Ms Blackford as a travel agent was at all analogous with the office of the architect in Finn.
Were the overseas travel expenses of a private or domestic nature?
39. On the evidence, I am satisfied that none of the overseas travel expenses of Mr Sanchez were of a private nature. It might be suggested that part of the time spent (and hence, part of the expenditure incurred) by Mr Sanchez in Spain was private in nature. I am satisfied that the expenditure incurred whilst in Spain satisfied the requisite nexus with the derivation of his assessable income. Moreover and relevantly, in Hatchett (supra), Menzies J (sitting as a single Judge in the High Court) said (at page 498):
"My conclusion that the expenditure in gaining the Teacher's Higher Certificate was incurred in gaining assessable income in the circumstances carries with it the conclusion that the expenditure was not of a private nature. 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. ... I am satisfied that the payments here in question, falling, as I decide, into the first category, do not fall within the second.
40. I am also satisfied that the overseas travel expenses of Mr Sanchez were not of a domestic nature. I am unable to perceive a situation where overseas travel expenses of the kind incurred by Mr Sanchez would ever be of a "domestic" nature: see also
Commissioner of Taxation v Highfield 82 ATC 4463; (1982) 62 FLR 262 per Lee J at page 277.
Has Mr Sanchez obtained and retained written evidence of expenditure and kept travel records?
41. The substantiation rules in Division 900 of Part 5-30 of the ITAA require that Mr Sanchez substantiate his claims for overseas travel by obtaining and retaining written evidence of the expenditure and by keeping travel records. The respondent has conceded that he has satisfied the written evidence substantiation requirements in relation to travel expenses totalling $7,558.68. However, the respondent does not accept that he has substantiated the amounts described as "food and incidentals" totalling $1,820.58, being $1,604.33 on the RTW trip and $216.25 on the USA trip.
42. As to the claim for accommodation costs of $889.16 in Gijon, Spain, the amount excludes the marginal costs referable to his accompanying girlfriend. The claim is based upon a grossed-up amount of $994.12 appearing in Mr Sanchez's credit card statement (Exhibit A1, page 128). However, the claim does not satisfy the requirements of s 900-115(2) as the statement has not been provided by the supplier of the accommodation. Nor does the claim satisfy the requirements of s 900-125 (evidence of small expenses) or of s 900-130 (evidence of expenses considered too hard to substantiate). In the opening for the respondent, I was informed that no submissions would be put that the accommodation costs in Gijon had not been substantiated. In the circumstances, I am prepared to exercise the discretion available to me under s 900-195 (standing in the shoes of the respondent Commissioner), which involves a consideration of the evidence of Mr Sanchez to substantiate the claim. Given the nature and quality of the evidence available to me, I am satisfied that Mr Sanchez incurred the accommodation costs of $889.16 (s 900-195(a)), having already decided that he is entitled to the amount claimed under s 8-1(1)(a).
43. The amount claimed for food and incidentals of $1,820.58 raises some different considerations. In the summary of expenditure appearing in paragraph 9 above, the expenditure has been described simply as "food and incidentals". Elsewhere in the evidence it has been described more widely as "living costs and incidental travel costs". Details of the expenditure have been provided by Mr Sanchez (Exhibit A1, page 191 and page 235). Like the accommodation costs of $889.16, the claim does not satisfy s 900-115(2), s 900-125 or s 900-130. Nor, in my view, does the claim satisfy any other direct substantiation provision in Division 900. I must again consider the exercise of the discretion in s 900-195 and review the nature and quality of Mr Sanchez's evidence relating to the food and incidentals expenditure. He maintained contemporaneous diary notes of his activities on the RTW trip and the USA trip. However, there were largely no references in the notes to expenditure incurred. He made more detailed notes 2-3 years later in 2007. Again, there were no references at the time of these notes to expenditure incurred. Then, in February 2008, he added a column on the left of the detailed notes for the date and approximate time of the activities, and a column on the right for the approximate costs of the expenditure. According to his oral evidence, he did not keep receipts because he understood the costs of food, incidentals and accommodation on the overseas trips were tax deductible. When he prepared his contemporaneous diary notes, it did not occur to him to keep notes of expenditure.
Should the discretion under s 900-195 be exercised to allow the deductionclaimed for food and incidentals of $1,820.58?
44. In the exercise of the discretion in s 900-195, the ITAA does not provide any indication of the nature and quality of supporting evidence that can satisfy the respondent Commissioner (and, hence, the Tribunal). Earlier Tribunal decisions dealing with substantiation under previous legislation indicate that each case must be considered on its merits and a common sense approach applied. In
Chaudri v Federal Commissioner of Taxation 99 ATC 2138, the taxpayer incurred self-education expenses and travel-related expenses, but failed to comply with the substantiation requirements. The discretion was exercised as the Tribunal was satisfied the taxpayer had made a substantial attempt to comply as he had kept a detailed diary, he had relied on his tax agent's advice, he was generally an honest and decent man and all the relevant information had been put before the Commissioner. However, in Case 7/93 93 ATC 135, Member D J Trowse was at pains to clarify the extent of the operation of substantiation provisions. In my view, his words apply with equal force to Division 900 of the ITAA. At page 143, he said:
"26. The Tribunal feels compelled to comment upon certain of the final submissions made on behalf of the applicant. It seems that the tax agent representing the applicant is of the view that the requirements of substantiation should be administered in a practical and common sense way. He maintained that the getting of receipts and the making of diary entries were not practical and that the 'only fair approach is to make an annual estimate'. It seems that the purpose and design of this relatively new sub-division was to outlaw that very practice and the problems that flowed from it and there is no doubt that both the Commissioner and this Tribunal must interpret and apply the law as it appears in the legislation. It may well be that the keeping of documents and maintenance of records may cause inconvenience and that otherwise productive time is spent on recording but that is not to the point. If the deduction is sought, the substantiation requirement must be met. It seems probable that the introduction of these requirements was aimed at those taxpayers then abusing the system. Unfortunately all self-employed and employee taxpayers are caught in the substantiation net and must bear the consequences if they are to succeed with their claims."
45. I have considered the evidence of Mr Sanchez in relation to the expenditure claimed for food and incidentals. He kept no receipts and no details of the expenditure in contemporaneous records. When he did make more detailed notes of his travel activities, particulars of expenditure on food and incidentals were not included. Then, when he came to incorporate details of expenditure in his more detailed notes years later, they were approximates only. And it was clear that these approximates were largely (if not solely) as a result of his recollection. Having given the matter my fullest consideration, I am not satisfied that the nature and quality of Mr Sanchez's evidence warrants the exercise of the discretion in s 900-195.
46. For the reasons set out above, I set aside the respondent's objection decision in relation to the applicant's claim for overseas travel expenses of $9,985 under s 8-1(1)(a) of the ITAA.
47. The Tribunal sets aside the decision under review and in substitution decides that the sum of $8,337.34, comprising overseas travel expenses and Northern Territory food and incidentals, incurred by the applicant in the 2004/2005 year is allowable as a deduction under s 8-1(1)(a) of the Income Tax Assessment Act 1997.