Federal Commissioner of Taxation v. White.Judges:
Supreme Court of New South Wales
Helsham J.: The problem is whether a clerk employed by a firm of accountants, who attends an accountancy course at a technical college at night, is entitled to a deduction for his travelling expenses for doing so upon the basis that they are outgoings incurred in gaining or producing his assessable income. A taxation Board of Review decided that he is. The Commissioner has appealed.
The tax year in question is the year ending 30th June, 1973. Since January 1971 the taxpayer had been employed with a firm of accountants as an intermediate clerk. Before this, while in other employment, he had in 1966 commenced an accountancy certificate course at Meadowbank Technical College, and had by 1971 passed some subjects and failed others. He continued the course after he commenced his employment in 1971, although the content and name of the course was changed and its successful completion would not have entitled him to be admitted as a chartered accountant or to become a partner of the firm. However, the evidence establishes that some of the subjects he was studying in the tax year in question would have been of some assistance in the performance of his duties, that is to say as an audit clerk carrying out audit work and balance sheet verifications, and that upon an overall basis the course would have benefited him in his employment. There was no agreement with his employers that the completion of the course would lead to any promotion or increase in salary, but the senior partner of the firm said this -
``Was it a condition of his employment with the firm that he undertook the accountancy course at the technical college? - No, but we would have expected him to have done some studies to try and further his position with us.
The Chairman: You used the word `undertake'. Could you substitute the word `continue', do you think?
Miss Brady: I will rephrase that question. Was it a condition of his engagement with the firm that he continue with his accountancy? - No, it was not a condition, but if he did not carry out some studies he would have found that he would not be able to maintain his position, and others would have passed him, and he probably would not have been of any use to us, or sufficient use to warrant the salary we would have to pay him.
Was that the salary he was currently getting or a salary that he might be getting in the future? - The salary that he would be getting in the future.
Did you consider that course of study sufficiently related to the work he was doing for your firm to come within the general concept of studies that would assist him to be more efficient? - I cannot really say whether I thought one course was better than another but we did feel that this would assist him.''
While one can assume from the whole of the evidence that the pursuit of this course of study was encouraged by the employers, there is no explicit evidence from the taxpayer as to what his objects were in doing so. The fact that he commenced it before being employed with the firm of accountants and that he continued it after he had ceased to be so employed (in July 1973) would lend weight to the natural inference that he was intent on improving his own education and qualifications. But the evidence quoted above would enable some nexus to be seen between the course the taxpayer was continuing and the earning of his income, at least of assisting the continuance of that income and facilitating its increase. There is some relevance, therefore, of the course generally to the employment of the taxpayer.
In his tax return for the year in question the taxpayer claimed as a deduction under the heading ``Self-Education Expenses'' an amount for his fees, books and equipment incurred at the Technical College for the course. This claim was allowed, no doubt pursuant to the provisions of sec. 82JAA of the Income Tax Assessment Act, which permits expenditure on these aspects of self-education in connection with a prescribed course as an allowable deduction. The taxpayer claimed further deductions for travelling expenses and meals incurred in substance in going from his place of work to classes in the evening and then home. The Commissioner did not allow either, and disallowed an objection. A Board of Review upheld the objection with respect to the travelling expenses (an amount of $67).
The claim for entitlement to a deduction for travelling expenses such as those in question here cannot be made under sec. 82JAA since that section limits self-education expenses to expenses for fees, books and equipment; it is hence based upon sec. 51 of the Act. That section so far as is relevant provides -
``(1) All... outgoings to the extent to which they are incurred in gaining or producing the assessable income... shall be allowable deductions except to the extent to which they are... outgoings of capital or of a capital, private or domestic nature....''
The two members comprising the Board relying on the evidence I have quoted above, came to the conclusion that there was, following the words of Menzies J. in his reasons for judgment in
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494, a ``perceived connection'' between the outgoings involved in pursuing the course and the production of the taxpayer's assessable income. It is relevant to note that in putting the submission on behalf of the Commissioner that this conclusion was erroneous, counsel did not base any argument upon the fact that the claim related to travelling expenses; the argument, put on several bases, was that none of the education expenses in this case were allowable deductions under sec. 51 because they were not incurred in producing the assessable income of the taxpayer, or if they were, they were outgoings of capital or of a capital, private or domestic nature.
The solution of the problem in this case really depends upon an analysis of the decisions in two cases -
F.C. of T. v. Finn (1961) 106 C.L.R. 60 and F.C. of T. v. Hatchett (supra) - and a determination of whether the education expenses incurred in this instance fell into the same category as those held to be outgoings incurred in gaining or producing the assessable income in those two cases.
Before making any such analysis, various aspects of the case dealt with in argument may be put on one side. The first is that it would seem to be accepted that the outgoings need not be related to the income of the tax year in question in the sense that the expenditure is for the purposes of earning the amount upon which the assessment is based; and this would seem to be so whether the income is derived from the carrying on of a business or is earned by an employee (see F.C. of T. v. Finn (supra));
Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (1935) 54 C.L.R. 295;
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47; F.C. of T. v. Hatchett (supra)).
Secondly, it is not enough that the expenditure is a prerequisite to earning the assessable income in the sense that the particular income could not be earned without such expenditure (
Lunney v. F.C. of T. (1957-58) 100 C.L.R. 478;
Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171); so that the fact that the course could not have been pursued unless the employee had incurred the expense of travelling to the College does not of itself take the claim any further.
Thirdly, I take it to be established beyound question that the acquisition of knowledge is not to be treated as if it were an outgoing to acquire a capital asset, nor are the expenses incurred in its acquisition to be treated as being outgoings of a capital nature. As it was put by Menzies J. in Hatchett's case (supra) -
``There has been some suggestion that to equip the taxpayer's mind in order that he may have higher earning capacity is an affair of capital... This is, I think, a misunderstanding. It seems to me that it would be wrong to consider any of the expenditure here under consideration as an outgoing of capital or of a capital nature.... In the field of taxation as in the field of business `capital' is used in contrast with `revenue'; it has no reference to a man's body, mind, or capacity.''
(See also Finn's case (supra)).
Fourthly, the fact that an employer encourages an employee to undertake study relevant to the employment is not sufficient to bring the expenses incurred in connection with such study within the ambit of sec. 51 of the Act for this reason alone (see Hatchett's case (supra) at p. 4187).
Each of the two decisions in Finn's case and Hatchett's case must be assessed with constant reference to the facts which gave rise to them. Nevertheless it is clear that both cases are authority for a proposition that expenses incurred in connection with education undertaken by an employee and related to his
ATC 4021employment may be outgoings incurred in gaining or producing income from his employment. It is necessary to try to ascertain from them what will, in any particular case, determine whether an expenditure is or is not such an outgoing.
Finn's case (supra) involved the expenses of an overseas trip made by a senior architect employed by the Western Australian Government during leave accumulated by him and used for this purpose; during the trip he devoted himself to the study of architectural matters, his purpose being to improve his capacity to do the work for which he was paid and to further his chances of promotion. The expenses were held to be incurred in gaining or producing his assessable income. I believe one can put the reasons for this decision on two grounds. The first and narrower ground is that the trip and expenses connected with it was and were simply part and parcel of his employment, taken and incurred during and as part of his job and, I suppose one could add, what one could clearly see as being an activity appropriate to the office held. As it was put by Kitto J. (p. 69) -
``His assessable income consisted of or included a salary which was payable from time to time in virtue of his holding the office of a senior design architect in the Public Works Department of Western Australia. It is, I think, a correct application of the terminology of sec. 51 to say that he was engaged in `gaining' that salary whenever and so long as he acted in the fulfilment of his office; for the salary payable was his remuneration for everything comprised in or incidental to his service.''
His Honour went on -
``But it was nevertheless in my opinion incidentally to the proper execution of his office and not otherwise that he engaged in those activities. For the office was of a kind which by its nature made incumbent upon the occupant much more than the performance of set duties at set times. 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, in the interest of the State even if also in his own interests, to his knowledge and understanding of architectural achievements and trends overseas, both in design and in construction, and of endeavours made and being made to solve architectural problems such as might from time to time confront his Government.''
He added that the taxpayer was acting ``within the scope of his office'' (p. 70). Dixon C.J. also said (p. 67-8) -
``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. He was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government. His journey abroad and what he did while in Europe, as well as in South America in the following year of income, was therefore in a correct sense incidental to his employment and most relevant to it.''
It was a case in which the expenditure was incurred in the process of carrying out the duties which gave rise to the assessable income.
The second or wider ground for the decision is that expenses incurred by a taxpayer for education that will better equip him as an employee to carry out the duties of his employment and will further his prospects of advancement in that employment and so increase his income can be outgoings incurred in gaining or producing his income. As it was put by Windeyer J. (p. 70) -
``Generally speaking, it seems to me, 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. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion.''
Menzies J. followed and applied Finn's case in reaching his decision in Hatchett's case. This
ATC 4022latter case involved a school teacher who claimed as allowable deductions under sec. 51 two separate expenses, one concerned with gaining a Teacher's Higher Certificate and the other being University fees incurred during the pursuit of an Arts Degree at a University. The obtaining of a Teacher's Higher Certificate brought as a matter of course a higher salary to the person obtaining it as well as putting him in a position to earn more in the future; expenses incurred shortly before and in order to obtain it were held to be allowable deductions under sec. 51. A University Degree, the obtaining of which was encouraged by the employer, the Education Department of Western Australia, which contributed towards the fees, could lead to promotion to positions in the service for which the holding of a University Degree was a prerequisite; the fees paid by the taxpayer in pursuing his Arts Course were held not to be allowable deductions.
As I have said, his Honour, in reaching his decision as to both expenses, stated that he believed he was supported by Finn's case. I do not think that what I have termed the narrower basis for the decision in Finn's case can be applied to support the decision in Hatchett's case, for I do not consider that the study undertaken and the expenditure incurred could be said to be part and parcel of the employment of the taxpayer in the way it was in the former case; rather was the study undertaken by the school teacher study activity ab extra which would better equip the taxpayer to carry out the duties of his employment and so further his prospect of advancement in that employment. And looked at in this light I consider the basis of the decision in Hatchett's case is clear. So far as concerns the Teacher's Higher Certificate the effect of the study activity which involved the expenditure was clear and demonstrable - the obtaining of the certificate had a direct and immediate result in increasing income; the certificate was obtained, and the expenses incurred in obtaining it were therefore outgoings incurred in gaining or producing income. In the case of the University fees, the activity in which they were incurred had no such clear effect upon the taxpayer's income, nor could any effect in the future be predicted; there was no ``perceived connection'', as his Honour put it, between the outgoing and the income.
As the result of the decision in the two cases it seems to me possible to say that expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under sec. 51 when it can be said that those studies are part and parcel of the employment, which means that the expenditure is incurred in the process of carrying out the employee's duties, or, even if they are not such, they can be seen to have a direct effect on income. Where that cannot be seen, I think it will be difficult to establish the necessary connection between the study activity and the employment so as to give study expenses the character of outgoings incurred in gaining or producing the income derived from the employment.
In my view there is no sufficient association in the present case. It is not enough, as was said by Menzies J. in Hatchett's case, that the course of study relevant to his employment pursued by an employee should be likely to enable him the better to carry out his work and hence to obtain promotion, even if encouraged by his employer. It is not saying anything different if the situation be that without undertaking a course of study encouraged by his employer a person may not be able to improve his position in his employment. And there is nothing more than that here. It is not sufficient to enable the expenditure incurred in this case in connection with the study activities to be claimed as outgoings incurred in gaining or producing assessable income.
I should, I think, mention an argument that was pressed on behalf of the Commissioner, namely that a distinction in this field must or ought to be drawn between study, and the expenses associated therewith, directed towards obtaining an initial qualification, as it was called, and that directed towards nurturing or furthering an established professional calling. It was put that the decision in the two cases to which I have referred would require the applicability of sec. 51 to be confined to situations of the second type and denied in the case of the gaining of an initial qualification. It was also put that study expenses incurred in seeking an initial qualification should be categorised as outgoings of a private nature even if they were also incurred in gaining or producing assessable income.
I do not think that either of these contentions is correct. While it may be easier to see a connection between study expenditure and income from employment in the case of a person who, in the words of Windeyer J. in Finn's case, gains his income by the exercise of his skill in some profession or calling, there is in my view no reason why activities of a person seeking to gain, or in gaining qualifications for the first time, may not be so closely associated with his employment as to have the necessary connection between expenditure on study and the earning of assessable income. Likewise I can see no reason why study for initial qualification of some sort is so different in nature from study undertaken by a skilled person the better to equip himself to perform his skills as to render the expenses incurred in the one outgoings of a private nature but not in the other. Where the relationship between the expenses incurred in education and the earning of income is so close as to enable expenditure properly to be called an outgoing incurred in gaining or producing the income it is difficult to see how it can be an outgoing of a private nature or how one can assess the extent to which it might be such.
The appeal will be allowed.