CASE 9/2005

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 683

Decision date: 19 July 2005

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BH Pascoe (Senior Member)

These are applications to review decisions dated 29 June 2004 of the Commissioner of Taxation (the respondent) to disallow objections to assessments of income tax for the years ended 30 June 2001 and 30 June 2002. The objections were against the disallowance of a deduction for expenditure incurred by VBI (the applicant) by way of fees paid to a psychologist. The fees amounted to $9750 in the year ended 30 June 2001 and $8475 in the year ended 30 June 2002. Alternatively, the applicant claimed that the fees paid were a rebatable amount for the purposes of s 159P of the Income Tax Assessment Act 1936 (the 1936 Act) as medical expenses.

2. At the hearing the applicant was represented by Mr M. Anderson, an accountant, and the respondent by Mr P. Sest of counsel. Evidence was given by the applicant and by his psychologist. Pursuant to s 14ZZE of the Taxation Administration Act 1953, the applicant requested that the hearing be held in private.

3. The witness statement dated 25 November 2004 filed by the applicant prior to the hearing usefully sets out the background to this matter. It states:

``...

Most of my work as a Registered Nurse has been on specialist medical units. On these units nurses are responsible for caring for very sick babies and children, and children who sometimes die. Day to day clinical and managerial responsibilities were manifold and often very intense. I found the work very rewarding but very stressful. In May 1996 I sought the help of [a psychologist] as I had began to engage in substance abuse. [ He] was a lecturer in psychology when I studied [at university], and I new he had a private practice as a therapist.

Not long after commencing therapy... my substance abuse ceased but I still lacked the skills to function at the highest level in a very demanding work environment. I did not wish to choose another career because the work with children and their families was extremely gratifying.

Because of the time I spent with [the psychologist] I was able to progress in my career to the point where I am now a highly specialised clinician. My work is still with chronically (and occasionally acutely) ill babies, children, adolescents, and their families, but as my work is no longer based on the ward, there is not the same intense work environment that led me to seek help from [the psychologist].

I chose to leave therapy... in December 2003.''

4. In his oral evidence the applicant said that he was aware, initially, that the day-to-day experiences of his work could be distressing but did not have the internal resources to deal with such experiences. He said that the therapy provided by the psychologist eased the early distress but that he was concerned that it could return without ongoing therapy and believed that his ability to perform his duties improved. He acknowledged that it was his own decision to consult a psychologist and he was not referred or recommended by any other person. The applicant accepted that programs are available at the hospital to assist staff in coping with stressful situations but maintained that such resources were meagre in 1996. He noted that one on one therapy is now available through the hospital.

5. The psychologist has been registered as a psychologist for 20 years, lectures at two tertiary institutions and conducts private practice. In oral evidence he said that a large proportion of his patients are nurses. He said that the applicant was in psychotherapy from May 1996 to December 2003. Initially he attended once per week but this was soon changed to two sessions a week. The applicant continued to attend at that level until December 2003. He presented initially with a substance abuse problem but the focus of the therapy quickly emerged as related to his work. The psychologist acknowledged that there were problems in the applicant's private life but believed that the problems would not have occurred if it had not been for the workplace problems. In a report dated 21 November 2004, the psychologist said that the nature of these topics changed when the applicant transferred to a daytime educational unit in 2002. He said that, while some work related topics remained, mostly the topics came to concern his natal family, his adolescence, his relationship and having a baby. The psychologist accepted that psychotherapy sought to change or strengthen personality in order to address life itself. He acknowledged that early life problems of the applicant, particularly the relationship with his

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ATC 195

father, were relevant to the therapy and his work problems.

6. It was submitted on behalf of the applicant that the consultation fees paid to the psychologist were an allowable deduction because the sessions where relevant and necessary to enable the applicant to work effectively in an extraordinary and stressful workplace environment. Reliance was placed on the decisions in
FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60 and Administrative Appeals Tribunal Case 8419
(1992) 24 ATR 1183. Alternatively, it was argued that the expenditure constituted payments to a legally qualified medical practitioner and was subject to rebate under s 159P of the 1936 Act.

7. On behalf of the respondent, Mr Sest submitted that the fees paid to the psychologist were not incurred in gaining or producing the applicant's assessable income. It was said that the expenditure was connected with the applicant's health not his income. It was, at best, a prerequisite to the earning of income and its essential character was personal and private expenditure. Mr Sest argued further that the expenditure does not constitute medical expenses within the meaning of s 159P of the 1936 Act.

8. To be allowable as a deduction the expenditure must come within the provisions of s 8-1 of the Income Tax Assessment Act 1997 (the 1997 Act). As the applicant's income is derived from employment the relevant provisions are:

``8-1(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
• ...

8-1(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.

...''

9. The first issue is whether the fees paid to the psychologist can be considered as an outgoing incurred in gaining or producing the applicant's assessable income by way of salary as a nurse. It has long been established that incurred in gaining or producing is to be understood as meaning incurred in the course of gaining or producing (
FC of T v Payne 2001 ATC 4027; (2001) 202 CLR 93). The question to be asked is whether the occasion of the outgoing operates to give it the essential character of a working expense, that is, whether the occasion of the outgoing is to be found in the income-earning activity itself (
Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431 at 436; (1949) 78 CLR 47 at 57). The taxpayer must show a real connection between the expenditure and the taxpayer's employment activities as an employee, in order for the expenditure to be deductible (
FC of T v DP Smith 81 ATC 4114 at 4117; (1981) 147 CLR 578 at 586). An outgoing, in order to be deductible, must be incidental and relevant to the activities directed at gaining or producing the assessable income (
W Nevill & Co Ltd v FC of T (1937) 4 ATD 187 at 196; (1937) 56 CLR 290 at 305). Consequently, the many decided cases in relation to allowable deductions have required a consideration of the essential character of the outgoing, the connection between the outgoing and the assessable income and whether the outgoing is incidental and relevant to the income producing activity. Frequently there is a consideration of the ``nexus'' between the outgoing and the assessable income.

10. Here it was accepted by the psychologist that the commencement of the treatment arose from a substance abuse problem. He acknowledged that the psychotherapy sought to change or strengthen personality in order to enable the applicant to cope more effectively with life itself. All of the applicant's life problems needed to be dealt with and not limited to performance of his employment. Good physical and mental health may well be a prerequisite to the derivation of employment income, but are also relevant to many other life activities. It is difficult to accept that the essential character of outgoings related to treatment of personality and mental well being

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ATC 196

can be considered as a working expense with the required connection or nexus to the derivation of salary income.

11. The applicant sought to rely on the decisions in Finn's case and Administrative Appeals Tribunal Case 8419. The former dealt with overseas travel expenses of an employee architect and found that these were deductible on the basis that the taxpayer was improving his professional skill and knowledge. The latter case dealt with a claim for attendance at speech course by a senior journalist. The Tribunal found that the course was designed to overcome deficiencies in the taxpayer's speech to better equip him for interviews and broadcasting. Specifically, the Tribunal found that there was no medical component in the course and the costs incurred were incurred in maintaining the taxpayer's ability in his profession so as to be deductible. It should be noted that the Tribunal was clear that, if the expenditure was for a course for medical therapeutic purposes, such expenditure would be private to the individual. Here, it cannot be said that the outgoing's incurred by the applicant were directly related to the improvement or maintenance of a professional skill or knowledge. The outgoings were related to his overall mental outlook and not the specific professional skills involved in his employment. The cases relied upon are clearly distinguishable from the facts of this matter. Here, the finding is that the required essential character of the outgoings cannot be found in the income earning activity nor is it incidental and relevant to that activity. It is relevant to the overall mental health and life skills of the applicant.

12. Even if it could be said that the outgoing was incurred in gaining or producing assessable income, which is not accepted, the outgoing was of a private or domestic nature. It was a combination of the pre-existing mental health and personality of the applicant and the particular stresses of the work, which led to his decision to seek psychotherapy. Treatment for physical or mental health is inherently of a private nature.

13. The alternative argument was that the expenditure constituted medical expenses within the meaning of s 159P of the 1936 Act. In that section, the definition of medical expenses, insofar as they are relevant to this matter state:

``159P(4) In this section:

...

medical expenses means payments:

• (a) to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation;
• ...
• (d) for therapeutic treatment administered by direction of a legally qualified medical practitioner;
• ...''

14. Mr Anderson submitted on behalf of the applicant that a person registered under the Psychological Registration Act 2000 (Victoria) is a legally qualified medical practitioner. The psychologist here was so registered. There is no definition within the Act of a legally qualified medical practitioner. While the psychologist was registered, I am of the view that he is not a legally qualified medical practitioner as that term is generally accepted. The requirement is that the practitioner is qualified under the relevant legislation to practice medicine. A psychiatrist is so qualified but a psychologist is not. It can be said further, that the payments to the psychologist were not in respect of an illness. I would be surprised if the applicant would be prepared to say that he was suffering an illness. In the same way as a person will incur expenditure to improve physical fitness, the applicant incurred expenditure to improve his mental fitness from a source other than a legally qualified medical practitioner. It is clear that the treatment by the psychiatrist was not administered by direction of a legally qualified medical practitioner. It may be seen as incongruous that all that may have been required to have the expenditure within s 159P of the 1936 Act was for the applicant to arrange for his general practitioner to formally refer him for psychotherapy. Unfortunately this did not happen. Consequently, the expenditure is not subject to rebate under s 159P of the 1936 Act.

15. It follows from the forgoing that the decisions under review should be affirmed.