MD Allen SM

Administrative Appeals Tribunal


Decision date: 11 December 2001

MD Allen (Senior Member)

At the conclusion of the hearing of [this] matter the terms of the decision intended to be made and the reasons therefor were stated orally. After service upon the Applicant of a copy of the decision that was in fact made, the Applicant pursuant to sub-section 43(2A) of the Administrative Appeals Tribunal Act 1975 requested the Tribunal to furnish to the Applicant a statement in writing of the reasons of the Tribunal for its decision.

2. The oral reasons for decision have been transcribed by Auscript, the Commonwealth Reporting Service. Whereas those oral reasons may reflect the inelegance of an extempore decision, they are in fact the reasons for the said decision.

3. The said transcript is annexed hereunto and furnished to the Respondent and to the Applicant as it is the reasons for the Tribunal's decision.


In this matter the applicant pursuant to an application lodged with the Tribunal on the 16th day of February 2001 seeks review of an objection decision disallowing an objection which decision was dated 31 January 2001. It is common ground between the parties that the issue in dispute is the disallowance of the sum of $13,095 as a deductible pursuant to section 8-1 of the Income Tax Assessment Act 1997 being a self education expense. So far as is relevant the particular section reads:

``8-1: 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) is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.''

Subsection (2) of section 8-1 refers to the inability to deduct a loss or outgoing of capital or of capital nature or a loss of a private or domestic nature. It seems clear from earlier cases that these expenses are certainly not of a capital nature. The expenses themselves were undertaken or incurred, I should say, by the applicant in attending a course at an institution which goes under the name of Mastery University.

ATC 2010

At the outset, as is pointed out by the High Court in
Lunney v FC of T (1958) 11 ATD 404; (1958) 100 CLR 478, whether moneys have been expended in the course of gaining or producing accessable income depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived. In other words, it is submitted by Mr Mihail for the Commissioner the test here is that of the essential character of the expenditure and that is of course an objective test as was pointed out for example in
Magna Alloys & Research Pty Limited v FC of T 80 ATC 4542; (1980) 33 ALR 213.

The applicant is a serving member of the Royal Australian Air Force. He graduated from the Australian Defence Force Academy and his appointment in the service is that of what is termed a logistician. In documents which became exhibit A2 in these proceedings some details of his job description were given. It said:

``The duties are diverse and involve the support of Air Force operations and activities. Most duties require the officer to be responsible for the welfare and management of airmen, airwomen and civilian staff and to exercise control over modern and valuable equipment. Logisticians also utilise specialist skills (usually provided by the Air Force) in areas such as computing, catering, warehousing, stock control, equipment accounting, procurement and provisioning and project management.''

The document goes to set out various sections of the RAAF in which a logistician may serve and not only to what might be regarded as supply functions. There are catering functions, air movements control and also personnel functions. The document then says:

``In all of the above areas you will be responsible for the management of airmen, airwomen and civilians. They are a valuable asset of the RAAF and will work with you in the discharge of your responsibilities. You will also be expected to participate in the effective management of your unit both in your professional role as a logistician and as a junior executive responsible to your commanding officer.''

Further, it stated:

``Opportunities will also exist for employment in Command and Air Force Headquarters appointments in areas such as computing, capital equipment, acquisitions, logistics policy or logistics research. Other positions outside Australia will also become available as supply officers are currently serving in the United States, the United Kingdom and Malaysia.''

It is probably indicative of the type of duties undertaken to have regard to the applicant's actual career. As I understand it from his evidence his first posting was managing a group of 20 to 25 people both RAAF members and civilian employees in the Publications Unit which involved technical matters as well as warehousing. He now however has been posted to a position with the Joint Intelligence Agency.

The course itself he said improved his proficiency in the controlling of subordinates and how to motivate them. More importantly, he thought it fitted him for promotion. His evidence is that although a graduate from the Australian Defence Force Academy initial appointment is not into the RAAF on a permanent commission but officers are assessed after a period. In the applicant's case he was offered a permanent commission as opposed to a further short term commission. He must serve time in grade to reach the rank of flight lieutenant but promotion to higher ranks is by selection. Part of the selection tools are the annual officer evaluation reports and in those reports external courses would be noted and I gather would be noted favourably.

The applicant, as well as attending the particular courses, obtained some assistance from the RAAF in meeting his fees. In this regard I refer to the document in exhibit A2 which is annexure C to Defence Instruction General Personnel 05-1 which is subtitled Air Force Personnel 34-17. It's the Air Force annexure to the General Defence Department Instruction regarding the Defence Force Assisted Study Scheme. Importantly, paragraph 3 reads:

``DFASS -''

which I understand means Defence Force Assisted Study Scheme-

``- will generally only sponsor those courses that provide skills and qualifications that (a) are directly related to the member's

ATC 2011

current employment specialisation or mustering or (b) are required for commissioning, remuster or transfer between specialisations or (c) allow the applicant to be competitive for out of specialisation/mustering positions.''

The approving authority is Headquarters Training Command. Now, as pointed out by the respondent the Air Force gave assistance and approved the study is not determinative of itself but to my mind it does indicate that there was regarded a degree of relevance to the applicant's employment in the RAAF. This is further defined by the document T10 at page 57 where at the time of his application for assistance the applicant's superior officer who, although a civilian, held a Wing Commander equivalent posting and who said:

``Will enhance member's ability to perform in the RAAF at a high level in the future.''

The starting point to consider whether education expenses are deductible must be the decision of the High Court in
FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60. There Dixon CJ pointed out that such expenditure was not of a capital nature and said [at 351]:

``... The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, lthough sometimes in vain.''

A later case was that of
FC of T v Hatchett 71 ATC 4184; (1971) 125 CLR 494. That case disallowed expenditure on a university degree by a primary school teacher. The case has not met with universal approbation and if I can refer to what was said in the case by Waddell J in
FC of T v Smith 78 ATC 4157 at 4161; (1978) 19 ALR 493 at 498-499:

``In my opinion this decision does not establish that educational expenses of the kind here in question must, in order to be deductible, relate to a course of study which has as its necessary consequence an increase in salary. What Hatchett's case decides, I think, is that educational expenses which have the necessary consequence of an increase in salary are deductible and that educational expenses paid in respect of a course which, if successfully completed, makes the taxpayer likely to do a better job and therefore more likely to obtain promotion, but which the taxpayer had no real prospect of completing, are not deductible.''

Hatchett was also discussed by Hill J in
FC of T v Studdert 91 ATC 5006; (1991) 33 FCR 75 which seems to me to be the latest word on the subject. At ATC page 5012; FCR page 82 his Honour said:

``At the heart of the Commissioner's submissions was the decision of Menzies J in FC of T v Hatchett (supra). That case has been the subject of some criticism: eg Income Taxation in Australia, RW Parsons, Law Book Company Ltd 1985 at 464. The comments made by his Honour in that case must, however, be seen in the context of the facts of that case.''

His Honour continued at ATC page 5013-5014; FCR page 83:

``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
FC of T v Smith 81 ATC 4114; (1980-1981) 147 CLR 578, where the payment of a premium by an employee on a loss of income policy was held deductable, irrespective of the fact that no income might ever have derived under the policy, and indeed, where presumably the employee might have desired that no income be derived under the policy.''

At the bottom of the page relating to the question of whether it is necessary or a promotion his Honour after referring to the Commissioner of Taxation said [at 5014]:

``... 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).''

ATC 2012

Finally his Honour said after referring to
FC of T v Wilkinson 83 ATC 4295; (1983) 14 ATR 218 where flying lessons for a air traffic controller were held deductible [at 5015]:

``In so doing G.M. Williams J, of the Supreme Court of Queensland, with respect correctly criticised the reasoning of the Board of Review which had applied a test that an outgoing was not deductible unless the incurring of that outgoing was an express or implied term of the taxpayer's employment.''

His Honour continued [at 5015-5016]:

``... 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.

I am of the view that in the present case these facts on their own, without reference to the effect of the course on promotion were sufficient to found the Tribunal's conclusion that the outgoing for the flying course fees had the necessary connection with the gaining or production of Mr Studdert's accessable income. They were relevant and incidental to that end, and relevant and incidental to the activities as flight engineer which more directly gained or produced that income.''

I would only note the very able argument put to me by Mr Mihail that the decision by Senior Member Pascoe in Case 14/94,
94 ATC 184 after a reference to Hatchett's case may be distinguished. Similarly, Case U101,
87 ATC 616 where Deputy President Purvis said [at 620]:

``It cannot be said that the studies comprised in the course were part and parcel of the employment, nor that they were incurred in the process of carrying out his duties as an employee of the respondent. Nor could it be seen that they would have a direct effect on his income.''

If the learned Deputy President intended to say that the expenditure had to be incurred in the process of carrying out his duties as an employee it seems to me that it conflicts with Hill J in Studdert's case supra. All in all therefore it seems to me that the test which I have to carry out is to look closely at the particular course, examine its content and decide in light of the explanation by Hill J in Studdert supra whether the items are deductible. Some of the duties of a junior officer are set out at T10 page 55 and indeed the applicant himself said of the course:

``That it was a course designed to enhance leadership and management capabilities. The course encompasses almost all facets in Air Force officers professional capabilities. It is a natural step from initial officer training and would serve to contribute to my role as a leader and manager for my entire career. The course covers leadership management, finances, decision making and physical enhancement.''

Looking therefore at the particular subjects which are contained in a series of folders which became exhibit A3, I was at the start concerned about the element which is entitled Life and Physical Mastery. However a perusal, albeit very brief, of the material and taking into account that the applicant has responsibility as the unit - or did have responsibility as the unit's physical training officer and had occupational health and safety responsibilities it seems to me that it was relevant for him to undertake. The course entitled Date with Destiny refers really to the psychology of motivating subordinates and how to deal with what in old fashioned terms was called man management and morale. It seems to me it was very relevant to the applicant's duties.

Results planning probably speaks for itself but in particular training as to time targets is set out. Again it seems to me completely relevant to the task of a logistician. I would say it is relevant to a logistician whether in the Air Force or elsewhere and I do not see it as a criticism of the course that non- service people could attend. Although unfortunately titled, the course being Emotional Mastery, it can be seen that it has a relevance by referral to the particular index. For example, titles such as Making Superior Evaluations, Negative Emotions, Making Change Last, Communication Upsets, Getting Leverage, Interrupting Limiting Patterns, Asking Better Questions all seem to have a particular relevance.

So far as those particular aspects are concerned I am objectively satisfied that they

ATC 2013

are relevant to the applicant's occupation and more so would certainly enhance his prospects of promotion having done the course. Otherwise however the course segment entitled Wealth Mastery is in my opinion of a purely personal nature. I agree it may have some relevance such as in financial counselling of RAAF members but overall having perused the document it seems to me personal rather than job related. It seems that although the applicant does have responsibilities to members under his command of a counselling nature the course itself just goes further and I would state that he is not to be or not required to be a financial planner for troops under him.

The whole course segment cost some $10,995. There were on top of that travelling expenses. Doing the best I can on the material I have it would seem that a fair division is to say that each subject of the course involved a cost of $2199. The total expenditure was $13,995 so subtracting the sum of $2199 on my maths that leaves $11,794. I propose therefore to set aside the decision under review and remit it to the respondent with the direction that the sum of $11,794 is an allowable deduction.

The only other matter I should canvass is penalty. In the circumstances it is perhaps not necessary to rule on it; however I feel that I should as a matter of completeness. Looking at the documents it seems to me, and it was not challenged in cross-examination, that the deduction was sought in good faith. There was never any attempt to deceive the Commissioner. The tax ruling in Reference TR98/9 certainly leaves the question of an allowable deduction open in my opinion and it would seem to me that it was fairly open for the applicant to request the deduction. Taxpayers are not to be penalised because they have had the temerity to ask for a deduction which the Commissioner later disallows.

In the circumstances therefore had it been necessary to do so I would have remitted the penalty aspect. I would also certify that these proceedings have concluded in the applicant's favour.

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