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LENTEN v FC of T

Members:
Dr G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2008] AATA 281

Decision date: 9 April 2008

Dr Gordon Hughes (Member)

1. This is an application for review of a decision by the respondent on 10 January 2007 to disallow a claim for deductions under subsection 8-1(1)(a) of the Income Tax Assessment Act 1997 (ITAA) for certain travel expenses incurred in the 2004 and 2005 income years and for expenses in relation to the purchase of newspapers and magazines in the 2005 income year.

2. In relation to the claim for travel expenses, the principal issue I have to decide is whether these expenses were connected with the applicant's present and/or future income-producing activities as a teacher or the applicant's private and recreational activities. In relation to the claim for deductions for the purchase of newspapers and magazines, the principal issue I have to decide is whether those articles were purchased for use in class activities or whether they were a private expense.

Background

3. During the relevant period, the applicant was a secondary school teacher employed by Woodleigh School in Baxter, Victoria.

4. The applicant was employed as Assistant to the Principal between 2003 and 30 June 2005. In 2005 he was appointed to the position of head of the Studies of Society and the Environment (SOSE) Faculty while continuing to simultaneously hold the position of Assistant to the Principal. This position was a yearly appointment and a Position of Responsibility (POR). The applicant's tenure in this position was up for review at the end of the 2005 calendar year.

5. Between 1 July 2004 and 11 October 2004, the applicant used part of his long service leave entitlement to visit various places throughout Asia, the United Kingdom and Europe with his wife. The Director of Curriculum at Woodleigh School endorsed the applicant's decision to use part of his long service leave to make the trip, although no contribution or allowance was made to him by the school for that purpose.

6. The applicant's trip, which he described to the Tribunal as a self-guided, educational discovery tour, primarily consisted of general package tours and self-guided expeditions to places mainly of historical interest and significance, including visits to World War II and medieval sites. He did not attend any professional conferences or lectures or visit any educational institutions during the course of the trip, but he did attend lectures at museums.

7. The applicant was not granted paid leave and he was not formally required to undertake the trip as a condition of his service at the school. The applicant nevertheless contended that it was expected that he would undergo self-education of this nature. The respondent did not dispute that he produced some assignments, which were subsequently utilised by the school, as a result of the trip.

8. The respondent contended that there was no evidence to show that the applicant received a promotion and/or increase in grade or salary to the position of Head of the SOSE Faculty as a result of undertaking the overseas trip. However, the applicant contended that the initiative inherent in planning and undertaking the trip was a relevant factor. The applicant said he received his promotion to head of faculty as a competitive appointment against three other challengers and in his contention, the initiative which he demonstrated in arranging and undertaking the trip most likely assisted. He received an increase in income as a consequence of the appointment as Head of the SOSE faculty.

9. The applicant emphasised that overseas travel of this nature was not a specific or mandated criterion for promotion but, in his case at least, was a relevant factor in helping him demonstrate that he was at the cutting edge of education professionals. He was particularly sensitive about the possibility of his age counting against a promotion and he had concluded that the trip would provide a means of demonstrating that he was not lacking in ideas or initiative.

10. For the 2004 income year, the applicant claimed an income tax deduction of $9,304 for work related travel expenses. The applicant attributed that amount to the following expenses incurred by him during the year:

(a) Return airfare from Melbourne to London $2,415
(b) Accommodation at Trader's Hotel Singapore - 3 nights 217
(c) Return airfare from Johor Bahru to Kota Kinabalu 265
(d) Travel insurance cover 388
(e) Additional car insurance cover 100
(f) Insight Europe tour 4,499
(g) Accommodation at Kensington, London - 1 night 150
(h) Accommodation at SofItel Silom, Bangkok - 2 nights 179
(i) Accommodation at Shangri-La, Kota Kinabalu 573
(j) Accommodation at St Cyr Sur Mur, 1 week & Arles, 1 week $ 1,039
  Total $9,825

Of the above expenses for the 2004 income year, the amount of $9,309 was in dispute.

11. In the 2005 income year the applicant claimed an income tax deduction of $7,256 for work related expenses. The applicant attributed that amount to the following expenses incurred by him during the year:

  • (i) an amount of $5,000 in respect of the following expenses:


    (a) Colonial Era Tour of Singapore $ 46.01
    (b) Wild Life Tour 153.00
    (c) Gatwick to Marseilles flight 347.07
    (d) Exploration of Roman Provence 23.63
    25.33
    (e) Visit to the Priory at Castle Acre 9.28
    (f) Trip to Cambridge, including cost of petrol 102.26
    (g) Train from Kings Lynn to London 64.60
    (h) Accommodation in Hotel Radnor, Paddington - 2 nights 395.07
    (i) Additional side tours paid directly to Insight Tour Director 353.98
    (j) Additional side tours paid directly to Insight Tours 1,047.40
    (k) Trip from Holland Park Station London to Grimston 63.84
    (l) Visit to The Broads, including cost of petrol 100.81
    (m) Accommodation at Dolgellau, North Wales - 1 night 142.72
    (n) Accommodation at Conwy, North Wales - 1 night 154.25
    (o) Accommodation at Betws-y-coed - 2 night 183.92
    (p) Return to Grimston, including cost of petrol 100.57
    (q) Rail from Kings Lynn to Kings Cross to Gatwick 71.50
    (r) Flight to Malta; accommodation in Qaara, Malta 913.21
    (s) Car hire in Malta 36.67
    (t) Day boat tour around three main islands of Malta 153.50
    (u) Flight to England, from Heathrow to Paddington Express 63.14
    (v) Accommodation at The Hyde Park, Paddington - 4 nights 760.92
    (w) Day tour around Bangkok 35.64
      Total $5,358.79

  • (ii) an amount totalling $2,256 in respect of the following expenses:


    (a) Union fees $ 464
    (b) Office costs 221
    (c) Sunscreen 93
    (d) Vehicle running costs 788
    (e) Depreciation 490
    (f) Class costs for the cost of purchasing The Bulletin,
    New Economist and 15% of the cost of purchasing
    The Age and The Australian newspapers    		 200
      Total $2,256

Of the above expenses relevant to the 2005 income year, the amount in dispute was $5,200, being $5,000 in respect of category (i) and $200 in respect of category (ii) above.

12. The applicant contended that Woodleigh School was dissimilar to many other schools to the extent that there was a direct connection between income earned by staff and the POR merit system which was determined by a readvertising/reappointment system at the end of a three year period.

13. The senior positions which the applicant held after 2004 were merit-based. The applicant said there were many ways in which a teaching career could be advanced through merit and he had, in the past, participated in a range of activities including involvement with associations, acting as an examiner, writing text books and cultivating extra curricular skills. After 30 years, however, he concluded that he needed to demonstrate further variety and ongoing initiative.

14. As Head of the SOSE Faculty, the applicant was responsible for supporting the teachers in his faculty in the development of new and improved curriculum standards, as mandated by the Victorian Government and the Victorian Essential Learning Standards (VELS). In implementing VELS, weaknesses were exposed at the school, in relation to its ability to teach World War II and medieval history. VELS mandated a curriculum and the school had no option but to teach it. The applicant formed the view that his ability to teach those topics would be enhanced by personal exposure to the relevant sites in Europe.

15. Activities conducted outside the immediate school or work environment, such as the overseas trip were, in the applicant's contention, mandated by the Victorian Institute of Teaching (VIT) for the purpose of renewing teachers' registration and were therefore directly linked to the applicant's right to earn income. The standards set by VIT included a requirement for 100 hours of research outside school hours as a pre-requisite for triennial re-registration. In addition, the applicant contended that humanities teachers in Australia had a professional responsibility to follow the UNESCO guidelines in support of professional and cultural exchanges between countries and travel abroad by teachers.

Legislation

16. For the purpose of these claims, the principal legislative provision is section 8-1(1) of the ITAA which states as follows:

"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"

Considerations

17. The respondent contended and the applicant did not dispute, that the following general principles as summarised in Taxation Ruling 95/14 paragraph 27 applied in determining whether an expense is deductible:

Overseas travel

18. In relation to the deductibility of overseas travel expenses specifically, it is necessary for the Tribunal to take account of the decision of the High Court in
Commission of Taxation v Finn (1961) 106 CLR 60.

19. In Finn, it was ultimately determined that the taxpayer's overseas travel expenses were deductible because, on the facts of that case, the expenses were sufficiently connected and relevant to his income producing activities as a salaried employee senior design architect with the Western Australian government.

20. Factors taken into account by the High Court included the extent to which the taxpayer's increased his knowledge as a result of the travel and whether that proved decisive in his subsequent career advancement; the extent to which his increased knowledge was recognised and valued by his colleagues; the extent to which the knowledge gained was necessarily incidental to the taxpayer's work; and the extent to which the expenses related to the acquisition or enhancement of skills relevant to the taxpayer's work.

21. The respondent referred me to the following observations by Dixon CJ in Finn at [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 motive 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 …

[68] 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."

22. The respondent also referred to the observations of Kitto J regarding the expectations of the taxpayer's occupation (at 70):

"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 Commissioner should avail himself of such opportunities as might arise to add … to his knowledge and understanding of architectural achievements and trends overseas …"

23. Consistent with the views of Kitto J, Windeyer J stated at 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."

24. Finn was subsequently considered by Menzies J in
Federal Commissioner of Taxation v Hatchett 71 ATC 4184; (1971) 2 ATR 557 in the context of an employee school teacher's self-education expenses. The court allowed a deduction in respect of 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. Menzies J stated at 560:

"[s]uch 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 connection 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 connection between the outgoing and assessable income …"

25. The respondent also referred me to the New South Wales Supreme Court decision of
Griffin v Federal Commissioner of Taxation 86 ATC 4838; (1986) 18 ATR 23. The case involved the deductibility of overseas travel expenses incurred by a professional electrical engineer who used his long service leave and annual leave, of his own initiative, to inspect and familiarise himself with railway electrification systems in Europe. Yeldham J considered the travel expenses incurred by the taxpayer to be deductible, stating that (at 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."

26. Yeldham J added in Griffin 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 SRA."

27. On the basis of the above authorities, the respondent contended that the applicant had failed to establish that any part of his expenses incurred in respect of overseas travel were related to his present or future income producing activities and that those expenses were instead private in nature. Specifically, the respondent contended that the applicant had failed to establish that any part of his overseas activities were related to deriving income from either the proper carrying out of his duties as Assistant to the Principal or to his appointment to the Head of the SOSE Faculty. The respondent conceded that the knowledge gained by the applicant would have been professionally beneficial to him, to his school, to his students and to other teachers of the school, but that this alone was not sufficient to make the expenses deductible.

28. I do not consider that the facts support the respondent's contentions. Obviously each case must be considered on its own peculiar facts and in this instance I am satisfied on the evidence that the expenses claimed by the applicant as a deduction in respect of his overseas travel not only directly contributed to his professional skill and knowledge but also directly led to his professional advancement within Woodleigh School.

29. The applicant was clearly motivated in planning and undertaking the travel to secure professional advancement and it is clear that he used the knowledge gained to produce work materials of some importance to the School. I accept the applicant's contention that he was able to capitalise on the initiative represented by the overseas trip in securing his position as head of the SOSE Faculty and consequent increase in income, in the context of a competitive internal work environment.

30. It has in the past been held that the costs of overseas travel are not deductible where the travel was encouraged but not prescribed by the employer (
Case P19, 82 ATC 81); or because of a lack of evidence as to the direct impact of the expenditure upon the taxpayer's subsequent promotion (
Case P79 82 ATC 386;
Case Q57 83 ATC 307;
Case R109 84 ATC 721;
Case 163, (1984) 27 CTBR (NS);
Case U120 87 ATC 721) or salary increase (
Case S12 85 ATC 165); or because self education was not the dominant purpose of the travel (
Case Q83 83 ATC 418); or because the travel essentially involved a mere broadening of the mind (
Case 109 87 ATC 657); or because the travel essentially involved only:

"recreational satisfaction in a field of endeavour which was also relevant in some ways to the field of activity in which [the taxpayer] carried out his principal income-earning activities (
Case U54 87 ATC 354 at 363)."

31. It has also been held in the past that the costs of overseas travel are deductible - again depending very much upon the facts of the particular case - in circumstances where the attitude of the taxpayer's employer reflected a strong expectation of travel (
Case T47 86 ATC 381;
Case S1 85 ATC 102) or where the taxpayer/school teacher's role at a particular school demanded specific skill development (
Case R73 84 ATC 509).

32. In the present case, I find that the dominant purpose of the applicant's overseas travel was to improve his knowledge and skill levels as a teacher for the purpose of enhancing his promotional opportunities within the school at which he was employed. I note that while non-mandatory expectations of overseas travel by the school would not of themselves justify the deductibility of the resultant expenses, the applicant in this instance undertook the travel with a view to supporting his colleagues in developing and improving a curriculum mandated by the State government and in attaining a level of extra-curricular professional activity consistent with standards also mandated by the State Government.

33. The respondent contended that even if I was to conclude that the applicant's expenses were deductible, the applicant had not established the part which was so attributable as to permit the Tribunal to apportion the expenses into deductible and non-deductible. I do not accept this contention.

34. I accept that the applicant's activities overseas, for which deductions have been claimed, were all directly related to the dominant purpose of the overseas travel and in all probability would not have been incurred had the applicant not been pursuing that dominant purpose.

35. I also accept, as a simple reality, that a minor element of the applicant's travel would inevitably have assumed a recreational character rather than work-related, notwithstanding the fact that in all probability the applicant would not have undertaken the overseas travel were it not for his decision to pursue this initiative in the interests of his own professional advancement.

36. Taking all these factors into account, I am of the opinion that the costs incurred by the applicant in undertaking the overseas trip should be reduced by some margin to take account of the inevitable incidental recreational component.

37. For the above reasons, I set aside the decision of the respondent in relation to the applicant's claim for a deduction in respect of travel expenses incurred in the 2004 and 2005 income years and substitute a finding that the amounts claimed for travel-related expenses are deductible under subsection 8-1(1)(a) of the ITAA 1997 to the extent of 75 per cent. I am aware that there is some element of imprecision and speculation in making an apportionment of this nature. I consider the apportionment nevertheless strikes an appropriate balance between the fact that the applicant undoubtedly derived and enjoyed incidental benefits which one would typically associate with a holiday whilst travelling abroad with his spouse; at the same time, for the reasons stated above, I am convinced that the time and effort spent in planning and undertaking the travel was motivated solely by professional considerations.

Magazines and newspapers

38. On the question of the deductibility of the applicant's magazines and newspapers, the respondent contended that the expenses were not incurred in gaining or producing assessable income as required by section 8-1(1)(a) of ITAA 1997, rather they were a loss or outgoing of a private nature and were therefore not deductible under section 8-1(2)(b) of ITAA 1997.

39. The respondent drew my attention to 95/14 Taxation Ruling - Income tax: employee teachers - allowances, reimbursements and work related deductions. TR 95/14 states in part:

  • "165. A deduction is not allowable under subsection 51(1) of the Act for the cost of newspapers and magazines, as it is a private expense. Even though an employee shop assistant may be able to use part of the information in the course of his or her work, the benefit gained is usually remote and the proportion of the expense that relates directly to work is incidental to the private expenditure.

    …

  • 168. However, if the main reason for the purchase of the newspapers is for their use in the course of teaching and that use can be clearly demonstrated, then the work-related portion of the cost is allowable …."

40. The applicant told me that volumes of newspapers were available at the school each day. In order to maximise the usefulness of newspapers in daily teaching, however, he would go to the newsagent early each morning and purchase a paper for the purpose of taking cuttings in relation to relevant topics and providing students with writing tasks in relation to those topics. In order to implement this practice, it was necessary to purchase the newspapers (and occasional magazines) before he arrived at school as part of his class preparation. He would buy one newspaper each morning, scanning for relevant issues.

41. I accept the applicant's evidence that he purchased the magazines and newspapers with the principal objective of using them in the course of teaching by searching for clippings relevant to his classes and for this reason some deduction should be allowed. However, there is a strong likelihood that he would have derived some incidental private benefit from the purchases. Presumably he was able - in part at least - to satisfy a natural intellectual inclination to read the daily newspaper in the course of scanning for relevant articles to put before his classes.

42. There have been many instances in the past where the Tribunal (or the Board of Review before it) has concluded, on the facts of a particular case, that a taxpayer's purchase of magazines or newspapers was not deductible, notwithstanding that the principal purpose of the purchase was to keep up to date or to perform one's job more effectively (
Case K68 78 ATC 667;
Case N67 81 ATC 349;
Case P14 82 ATC 586;
Case P124 82 ATC 629;
Case R70 84 ATC 493).

43. There have been other instances - analogous in many respects to the current case - where the cost of magazine and newspaper purchases has been deducted, in part on the basis that the purchases were partially used for the purposes of employment. In this regard, it is pertinent to note the comments of Dr Beck in
Case S12 85 ATC 165 - subsequently endorsed by the Tribunal in
Case U5 87 ATC 124 - at 169:

"Almost every intelligent income earner in our society buys a daily paper and reads more or less of it for private purposes. When such a taxpayer uses part of the derived information in the course of his or her work the proportion of expenditure for income earning purposes is irrelevant. That proportion is simply incidental to private expenditure … however where (as here) a taxpayer maintains that the main reason for buying the papers was to search for clippings which, on unrefuted evidence, are used in the course of teaching duties, I consider the extent of work usage must be determined and the appropriate deduction allowed. No one can make such a determination with certainty. I find it hard to accept that this taxpayer, and earnest and highly intelligent young woman, did not make approximately the same significant private use of her daily paper as other earnest and intelligent people do, and this has influenced my assessment of the proportion of newspaper expenditure that could be considered to be private."

44. I consider that the applicant made use of his daily purchases in order to improve his skills as a teacher but that, to some extent, the use of the items in this manner was accompanied by a parallel private benefit. Regardless of the manner in which the applicant may have prioritised his time and focussed his attention when perusing the magazines and newspapers and regardless of the fact that he would regularly take clippings from these publications, he would no doubt have simultaneously availed himself of the opportunity to absorb the content for private purposes.

45. The applicant has recognised this parallel private benefit in claiming as a deduction only 15 per cent of the cost of purchasing the daily newspapers, together with the full cost of magazines purchased. The Tribunal does not consider it appropriate to distinguish between magazine and newspaper purchases in this context - both should be subject to the same rate of deduction.

46. For the above reasons, I set aside the decision of the respondent in relation to the applicant's claim for a deduction for expenses involving the purchase of newspapers and magazines and substitute a finding that 15 per cent of the amounts claimed for the purchase of magazines and newspapers are deductible under subsection 8-1(1)(a) of the ITAA 1997.

Decision

47. The Tribunal sets aside the decisions under review and in substitution decides that:

  • (a) 75 per cent of the amounts claimed for travel-related expenses are deductible under subsection 8-1(1)(a) of the Income Tax Assessment Act 1997; and
  • (b) 15 per cent of the amounts claimed for the purchase of magazines and newspapers are deductible under subsection 8-1(1)(a) of the Income Tax Assessment Act 1997.


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