TING v FC of T
Members:FJ Alpins DP
Tribunal:
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
[2015] AATA 166
F J Alpins (Deputy President)
Written statement of oral reasons
1. On 23 February 2015, the Tribunal heard this application for review. After a brief adjournment, the Tribunal gave reasons orally for its decision. The parties have requested a written statement of those reasons. That statement, set out below, is an edited version of the transcript of the Tribunal's oral reasons, with headings added for convenience.
Introduction
2. This application for review primarily concerns the issue of whether certain expenses incurred by the applicant, Mr Ting, in undertaking post-graduate studies were deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the "ITAA 1997") from his assessable income earned as a school teacher during the year of income ending 30 June 2013.
3. During that year of income, the applicant was employed on a full-time basis as a teacher at Greensborough Secondary College. He was also enrolled as a part-time student in what was then known as the "Postgraduate Diploma in Management" (now called the "Graduate Diploma of Business Administration") at the University of Melbourne's Melbourne Business School.
Procedural history
4. In his income tax return for the 2013 year of income, the applicant returned income totalling $71,268 (including $65,780 earned from his employment) and claimed as an allowable deduction an amount of $19,779 for "work related self-education expenses", comprising the course fees for six subjects ($19,500), which included Financial Accounting ($3,900) and Marketing ($3,900), and textbooks related to those six subjects ($279).
5. Following an audit, the respondent issued a notice of amended assessment to the applicant in respect of the 2013 year of income, disallowing the deduction in question. The respondent also issued a notice of assessment of administrative penalty in the amount of $2,394.90, being 25% of the shortfall amount of $9,579.72, worked out on the basis that the shortfall amount resulted from a failure to take reasonable care to comply with a taxation law (s 284-85 and Item 3 in the table in s 284-90(1) in Sch 1 to the Taxation Administration Act 1953 (Cth) (the "TAA")).
6.
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The applicant objected to those assessments. The respondent allowed the objection in part, by remitting a part of the penalty pursuant to s 298-20 of Sch 1 to the TAA, to an amount equating to 18.75% of the shortfall amount.7. After the commencement of this proceeding, the respondent conceded that the applicant's objection ought to be allowed to a further extent, in that the course fees for four of the subjects (and one related textbook) in issue were deductible. In consequence, the respondent conceded that the decision under review should be varied so that the applicant is allowed a deduction for expenses totalling $11,844.15 for the 2013 year of income.
Issues and contentions before Tribunal
8. At the hearing, the parties' dispute was therefore confined to the deductibility of the applicant's expenses with respect to the other two subjects, being Financial Accounting and Marketing (and related textbooks), totalling $7,934.96, and the remaining penalty. It was not in dispute that the applicant's entitlement to a deduction under s 8-1 of the ITAA 1997 was subject to the operation of s 82A(1) of the Income Tax Assessment Act 1936 (Cth), which has the effect of reducing deductions in respect of expenses of self-education by the amount of $250.
9. Section 8-1 of the ITAA 1997 relevantly provides that "[y]ou can deduct from your assessable income any loss or outgoing to the extent that … it is incurred in gaining or producing your assessable income" (s 8-1(1)(a)). The essential question before the Tribunal is whether the applicant's self-education expenses with respect to his enrolment in the subjects of financial accounting and marketing were "incurred in gaining or producing" his assessable income.
10. The applicant contended that that was so firstly because his expenses with respect to the course considered in its entirety were wholly deductible; in the alternative, he contended that his expenses with respect to the two subjects remaining in dispute were deductible when each subject was considered on its own account.
11. The respondent contended that the applicant's expenses for the course were not wholly deductible and that, although the applicant's expenses with respect to the conceded subjects were deductible, the applicant's expenses with respect to the disputed subjects were not. The respondent maintained that, when regard is had to the applicant's duties as a teacher and the nature of the course he undertook and the subjects still in dispute, neither the expenses for the course considered as a whole, nor those relating to those particular subjects, have the requisite nexus with the gaining or producing of the applicant's income for the purposes of s 8(1) of the ITAA 1997.
Facts
12. During the 2013 year of income, the applicant was employed as a "Classroom Teacher Range 2", being one of two job classifications (range 1 and range 2), according to salary range, for classroom teachers set out in a document published by the Victorian education department which concerns teachers' roles and responsibilities. It is stated in that document that "[t]he primary focus of the classroom teacher is on the planning, preparation and teaching of programs to achieve specific student outcomes".
13. The document distinguishes classroom teachers from "leading teachers". It says with respect to the latter:
"Leading teachers will be highly skilled classroom practitioners and undertake leadership and management roles commensurate with their salary range. The role of leading teachers is to improve the skill, knowledge and performance of the teaching workforce in a school or group of schools and to improve the curriculum program of a school. Typically, leading teachers are responsible for coordinating a number of staff …..
Leading teachers are expected to lead and manage a significant area or function within the school …"
14. The applicant teaches science and maths at a senior school level. During the relevant year of income, the applicant taught the following subjects - psychology, chemistry, mathematics and science.
15.
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The applicant's duties also included organising a school activity, being the school's participation in the "State Schools Spectacular", which involved budgeting for that activity, selection of participants and arranging costumes and bus travel. He also coached school sporting teams, such as soccer and softball. Those duties are contemplated in the document to which I have referred as duties which a classroom teacher of his classification may be required to undertake "in addition to their rostered teaching duties".16. The course in which the applicant was enrolled during the relevant year of income is described on the Melbourne Business School's website as "the entry path-way into" the part-time MBA program. It is said to provide "a comprehensive introduction to the major areas of business management". Furthermore, it is described as:
"encompass[ing] an academically rigorous, current and practical curriculum aimed at developing managerial awareness, skills and judgement. It introduces students to the disciplines and concepts used in the management of business, government and non-profit organizations".
17. The subject Financial Accounting is described in a recent syllabus for the course as being "designed to provide students with foundation knowledge about external financial reporting by for-profit entities". The subject Marketing is described therein as enabling students to "acquire comprehensive understanding of the marketing management process", to "develop the ability to apply problem-solving techniques in marketing" and to "develop insight into the importance of the marketing concept in the strategic directions of modern organisations".
18. The applicant gave oral evidence and was cross-examined. He gave a detailed explanation of how he felt, and continues to feel, that the management course and the particular subjects remaining in dispute were sufficiently connected with his employment as a classroom teacher so as to warrant deductibility of his related expenses. It is convenient to note at this point that this focus in his evidence differed significantly from that of statements made by him in documents prepared prior to the commencement of the proceeding, in which he was more concerned to emphasise how the course increased his prospects of becoming a leading teacher, and perhaps eventually a school principal.
19. In his oral evidence, the applicant explained how the course in general, and those subjects in particular, assist him in undertaking his tasks in teaching and make him a generally better teacher. Amongst other things, he explained that they assist him in "framing" his explanations to students appropriately and that the subjects and course assist him in organising the State School Spectacular. With respect to the deductibility of his expenses relating to the marketing subject, he said that he sees marketing as having a wider meaning, which involves the identification and meeting of people's needs, which is what he seeks to do as a teacher. Under cross-examination, he said in effect that his approach to, and style of, teaching is affected by marketing principles.
20. Similarly, the applicant said, albeit in his statement of facts, issues and contentions, that "I believe that the job of a teacher is about management". The applicant gave evidence that he sees himself as representing his school in all his interactions. He said that he is asked for and gives input in staff meetings and to the school principal.
21. With respect to his expenses relating to the financial accounting subject, the applicant pointed out that during the relevant year of income he taught Year 9 and 10 mathematics, which both include a component called "[m]oney and financial mathematics". It is convenient to note at this point that those components are described in the relevant curriculum as involving, for year 9, "solv[ing] problems involving simple interest" and, for year 10, "connect[ing] the compound interest formula to repeated applications of simple interest using appropriate digital technologies".
22. The applicant also relied on letters of support from the school's principal and the Dean of the Melbourne Business School. I note that in the former letter the principal stated that the applicant "has aspirations to attain leadership in the Department of
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Education" and that a MBA (in which the applicant is now enrolled) "will be very useful in future for [the applicant] to apply for principal roles".23. Under cross-examination, the applicant accepted that neither his enrolment in nor completion of the course entitled him to an increase in his salary as a classroom teacher and that the only way available to him to gain an increased salary was to obtain a position as a leading teacher. He agreed that, as a relevant departmental document indicates, in order to obtain a position as a leading teacher, it is necessary to engage in an open competitive application process. In answer to a question from the Tribunal, the applicant said that there were about 60 to 80 teachers at his school, of which about 5 are leading teachers.
Relevant principles
24. The question posed by s 8-1(1)(a) is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?" (
Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at [11], citing
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57. In its subsequent decision in
Commissioner of Taxation v Day (2008) 236 CLR 163 at [30]-[31], the High Court, quoting that aspect of its decision in Payne with approval, stated that "[e]ssential to the inquiry is the determination of what it is that is productive of assessable income". In
Commissioner of Taxation v Anstis (2010) 241 CLR 443 at [30], the High Court said further: "To put it another way, one must ask how the assessable income was (or was expected to be) gained or produced". In the case of an employee's assessable income, that question requires consideration of "what their position involves", that is to say the "tasks to be performed and duties to be observed" (Day at [32]-[33]).
25. In keeping with general principles concerning the paramountcy of the statutory text in its construction, in Day the High Court said that the consideration of the question arising from the text of s 8-1(1)(a) as restated in Payne, "will provide a surer guide to ascertaining whether a loss or expenditure has been 'incurred in [the course of] gaining or producing … assessable income'" in any given case than recourse to cases concerning its application, given the terms of the provision and the intended breadth of its application (at [30] per Gummow, Kirby, Hayne and Kiefel JJ, Kirby J agreeing at [69]).
26. Furthermore, in considering whether the requisite nexus exists for the purposes of s 8-1(1)(a), one must not allow the statutory text to be supplanted by expressions used in the cases, such as those describing expenditure as "incidental and relevant" (Ronpibon at 56) and referring to its "essential character" (
Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478 at 498-499), as the law is in the legislation, not cases interpreting it (Day at [29], [69];
Baini v R (2012) 246 CLR 469 at [14]).
27. The reason or motive of the applicant for incurring self-education expenses is not determinative of the question of whether they were they were incurred in gaining or producing his assessable income (Anstis at [31], citing Day at [39]; cf.
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 17). In "many, if not most, cases the objective relationship between an expenditure and that which is productive of income will provide a sufficient answer to the inquiry posed by the section" (Day at [39], citing Fletcher at 18). Where the reason for the expenditure is apparent, it will not be necessary to inquire further; one "looks to the scope of the [taxpayer's] activities and their relevance to expenditure, rather than to a taxpayer's reason for the expenditure" (Day at [39], citing
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 309).
28. However, in my view the applicant's motivation is significant to the issue of the applicant's liability to an administrative penalty and its remission, as I explain later in these reasons.
Consideration
29. As I have indicated, the first issue to be addressed is whether the applicant's expenses in undertaking the course considered in its entirety are deductible under s 8-1. I have concluded that they are not. The occasion of those outgoings is not found in that which was productive of the applicant's assessable income. The evidence before the Tribunal
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establishes that what was productive of the applicant's assessable income was his employment as a classroom teacher, his tasks and duties in that respect being essentially pedagogical in nature. His involvement in organising a school activity and coaching school sports were ancillary to his classroom teaching. His responsibilities accorded in fact with those of a Classroom Teacher Range 2 described in the departmental document to which I have referred.30. I accept the respondent's submission that the applicant's income-earning activities as a classroom teacher stand in contradistinction to those of a leading teacher, which is a management role. The evidence, including both the applicant's oral evidence and the departmental document to which I have referred, establishes that employment as a classroom teacher is materially different from employment as a leading teacher. Promotion to the position of a leading teacher does not merely constitute increased income for the same income-earning activities; rather, it involves engagement in relevantly new income-earning activities for the purposes of s 8-1. Put simply, it means more pay for doing a different job.
31. The course was not required as a condition of the applicant's employment, nor was it required in order to fulfil his tasks and duties (cf
Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 at 67, cited in Day at [33]). Furthermore, the evidence establishes that it would not bring about an increase in his income from his current employment (cf
Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494 at 498). That required employment as a leading teacher.
32. Given its nature, the course did not improve or maintain the applicant's skills and knowledge as a teacher (cf. Finn); rather, it had the more general effect of increasing the likelihood of him being a better teacher, but that connection is too tenuous to make the course expenses deductible (Hatchett at 499).
33. While the applicant feels that the course made and makes him a better teacher, more responsive to the needs of students and parents and while it is admirable that he sees himself as a representative of the school at all times, those matters are not to the point. The fact that the applicant perceives there to be a connection between his course expenses and his current employment as a classroom teacher does not, in itself, justify deductibility - in that sense, as the High Court warned in Day (at [29]), the expression "perceived connection" used in Hatchett (at 499) can be misunderstood as giving the taxpayer's subjective opinion a part to play in determining whether his or her expenditure is deductible (
Federal Commissioner of Taxation v Klan (1985) 16 ATR 176 at 182-183 per Ormiston J).
34. Furthermore, while I accept that the applicant provides input about decisions at staff meetings and to the principal, on the applicant's evidence I find he does so merely in his capacity as a classroom teacher, like any other - he is not actually responsible for school management. I do not consider that the applicant's involvement in school activities, particularly the budgeting aspect of the school event, requires the kind of skills which might be derived from or improved by the course, given its nature; it is not enough to point to the fact that the course concerns management and that, in a certain loose sense, the applicant "manages" a school activity.
35. To the extent that the course would or might make the applicant more likely to obtain promotion to a position as a leading teacher, that does not make the applicant's course expenses deductible. In that respect the expenses were "incurred in getting, not doing" work; the expenses preceded the relevant income-earning activity and came "at a point too soon to be properly regarded as incurred in gaining assessable income" (
Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541 at 549;
Commissioner of Taxation v Cooper (1991) 29 FCR 177 at 198 per Hill J). The same can be said insofar as the course does or might assist the applicant in eventually becoming a school principal.
36. There is no evidence supporting the applicant's contention that undertaking the course increased his likelihood of retaining his current position, but I do not consider that that would satisfy s 8-1 in any event.
37. I turn now to the question of the deductibility of the applicant's expenses relating to the particular course subjects in dispute. Having regard to their syllabi
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and the nature of the applicant's employment, for consonant reasons with those I have expressed with respect to the course considered as a whole, I do not consider the expenses for those subjects to be deductible. Again, the occasion of those outgoings is not found in that which was productive of the applicant's assessable income.38. The applicant's rather convoluted explanation as to how he sees those subjects and his teaching as being connected to each other is not sufficient for the purposes of s 8-1. I accept the respondent's submission that the applicant's income earning activities did not require skills in financial reporting, nor in marketing, nor did they, or were they likely to, increase income from his classroom teaching. With respect to the connection that the applicant sought to demonstrate between his teaching of the financial mathematics component of Year 9 and Year 10 mathematics, which concerned the calculation of simple and compound interest, and aspects which he considered were helpful to that in the financial reporting subject, such a connection, if any, is far too tenuous. The same can be said with respect to the applicant's involvement in school activities.
39. To the extent that the payment of fees for each of those subjects might achieve some other end, such as making the applicant generally more educated or presentable in a general sense, or might improve his prospects of becoming a leading teacher or school principal, that does not suffice, for the reasons stated above.
Penalty
Reasonable care
40. I turn now to the question of the applicant's liability to an administrative penalty pursuant to s 284-75(1) of Schedule 1 to the TAA for a false or misleading statement constituted by his income tax return for the 2013 year of income.
41. The applicant bears the onus of proving that he took reasonable care in connection with the making of statement constituted by his income tax return for the purposes of s 284-75(5) of Sch 1 so that he is not liable to an administrative penalty pursuant to s 284-75(1) (s 14ZZK of the TAA; see
Sent v Commissioner of Taxation (2012) 128 ALD 34 at [159], [161]). (I note that it seems to me appropriate to express the onus in terms of s 284-75(5) rather than in terms of Item 3 in s 284-90(1) given that the latter provision will not arise for consideration if liability does not arise under s 284-75.)
42. The "reasonable care" test in item 3 of s 284-90 in Sch 1 of the TAA "calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations" (
Aurora Developments Pty Ltd v Commissioner of Taxation (No 2) (2011) 196 FCR 457 at [38]). In Aurora Developments, Greenwood J then said:
"The test looks to whether such a person would have foreseen, as a reasonable probability or reasonable likelihood, the prospect that the action or step or the failure to act or take an affirmative step would result in a shortfall amount and in determining that questions, a relevant factual enquiry is whether the taxpayer made the reasonable attempts a person in the position of the taxpayer ought to have taken so as to comply with the provisions of a taxation law."
43. One question to be answered in determining whether a taxpayer took reasonable care is whether, on the facts, there are steps that the taxpayer ought to have taken but did not take or steps that it did take that the taxpayer ought not to have taken (ibid, citing
North Ryde RSL v Commissioner of Taxation (2002) 121 FCR 1 at [82]).
44. I accept the respondent's submission that the applicant has failed to prove that he took reasonable care in connection with his income tax return for the 2013 year of income. The fact that the respondent has ultimately conceded that some of the applicant's expenses were deductible does not alter my conclusion.
45. A reasonable person in the applicant's circumstances, which included the claiming of a deduction which constituted a significant amount relative to his total income for the year, would have sought appropriate advice, further guidance from the ATO or applied for a private ruling before claiming the deduction in issue. Such a person would have foreseen,
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as a reasonable probability or a reasonable likelihood, that claiming the deduction in the absence of inquiry beyond that which the applicant did make, would result in a shortfall amount. I note that the applicant gave vague and brief evidence that he asked a fellow student or students studying the same course about the matter; in the circumstances, I do not consider that was adequate.46. The applicant also gave evidence that he had regard to ATO materials in preparing his tax return. The materials to which he had regard contain indications of self-education expenses which are not deductible, the terms of which should have caused him to make further inquiries, as they would have raised a real question in the mind of a reasonable person in the applicant's circumstances as to whether the applicant's course expenses were deductible.
47. That is particularly so given that I infer from the applicant's objection, read together with his income tax return, a statement made by him in an audit document and the letter from the school principal, that his primary motivation for undertaking the course was in order to obtain a position as a leading teacher or school principal in the future, rather than for the purpose of his current position as a classroom teacher. Although he denied that under cross-examination, I prefer the documentary evidence, which accords with the wider factual context when one compares the course syllabus with the applicant's teaching duties. Given the basis upon which the deduction was in fact claimed by the applicant, as indicated by the documents prepared by him read together, it is apparent that the applicant therefore took a rather selective approach in interpreting the ATO materials to which he had regard in preparing his return.
Remission
48. Section 298-20(1) in Sch 1 to the TAA provides that the Commissioner may remit all or a part of the penalty. I am not satisfied, having regard to the applicant's particular circumstances, that it is appropriate to remit all or any further part (beyond that already remitted by the respondent) under s 298-20 (see
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483 at [249] per Griffiths J (Edmonds J agreeing). Given my finding with respect to the applicant's primary motivation in incurring the course expenses, which affected the basis upon which the deduction was in fact claimed by the applicant, I do not consider that the fact that the respondent has conceded some of the claimed deduction warrants further remission of the remaining penalty. There are no other circumstances arising from the evidence warranting remission beyond that which has already been granted.
Conclusion
49. Given my conclusion that neither the course expenses as a whole, nor those relating to the disputed subjects in particular, were deductible during the relevant year of income and given my conclusions about the penalty assessment, it follows that the objection decision is to be varied solely to give effect to the respondent's concession with respect to four of the six subjects originally in issue.
50. Accordingly, the objection decision is varied so that the objection is allowed in part on the further basis that the applicant is allowed a deduction in the amount of $11,844.15 for the year of income ending 30 June 2013.
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