Federal Commissioner of Taxation v. Kropp.Judges:
Supreme Court of New South Wales
Waddell J.: This is an appeal against the decision of a Board of Review allowing an objection by the respondent taxpayer to the disallowance by the appellant Commissioner of a deduction claimed in his 1972 income tax return for the cost paid by him of air travel between Australia and Canada.
The taxpayer is a chartered accountant who is employed as a manager in the Australian firm of Price Waterhouse & Co., which carries on a public accounting practice in Australia and certain other countries. There are firms of professional public accountants practising in the name of Price Waterhouse & Co. in many countries of the world, the major firms being in the United Kingdom, United States of America, Canada, Europe, South America and Australia. Each of these firms is autonomous. There is also a firm known as Price Waterhouse & Co. (International Firm), the partners of which are each a partner in one of the major national firms. The International Firm does not carry out any professional work but is concerned with the maintenance and enhancement of a high reputation for the Price Waterhouse name throughout the world and to maintain the ability and readiness of Price Waterhouse firms throughout the world to offer the highest possible standard of service in any part of the world where services might be required by clients. The several National Price Waterhouse & Co. firms thus form, to use the words of the taxpayer in his evidence before the Board, ``internationally a fairly loosely knit federation of autonomous firms country by country''.
The Australian firm sends, at its expense, selected senior members of staff to overseas firms for secondment each year pursuant to the ``International Firm Staff Exchange Scheme''. However, there are expense limits to the number of staff which can be sent overseas in this way and for many years a policy has been actively pursued of encouraging staff members who indicate their willingness to pay their own way to work with Price Waterhouse firms in other countries. A substantial majority of the staff who have travelled overseas at their own expense in this way have rejoined the Australian firm some two to three years after leaving it. At the present time there are, in the Sydney office alone, thirteen staff members who have made private trips overseas to work for Price Waterhouse firms overseas at their own expense. Of these six are now managers and four assistant managers.
The policy of encouraging staff to travel overseas at their own expense is pursued because it is thought to provide very substantial and tangible advances for the Australian firm and for the members of staff concerned. Among these advantages are that the staff involved gain professional experience which they would not have in Australia, make friends and contacts in the firm in other countries and generally broaden their
ATC 4408horizons and mature as professional persons in a way which greatly assists the conduct of the Australian firm's practice, particularly in its international aspects.
The taxpayer joined the Australian firm in January 1967 as an audits clerk, having graduated in Commerce from the University of Queensland. He proceeded to sit for and pass the examinations of the Institute of Chartered Accountants and the Institute of Chartered Secretaries and was admitted to both Institutes in early 1970. Part of the way through 1970 he commenced an application ``to transfer overseas''. Arrangements were eventually made by the staff partner for him to be employed with the Canadian Price Waterhouse & Company firm in its office at Toronto from about the 1st August 1972. The taxpayer, then a senior accountant, resigned from the Australian firm on the 30th April 1972 and the following day left Australia by air for Canada. Apart from a small amount of interest he derived no income until he commenced his employment with the Canadian firm on the 1st August 1972. Early in 1974 the national staff partner of the Australian firm wrote to the taxpayer inviting him to participate in the ``International Firm Staff Exchange Scheme''. He accepted and ceased working for the Canadian firm on the 31st March 1974. On the 5th April 1974 he went to London and on that day recommenced his employment with the Australian firm with promotion to the status of assistant manager. He worked in London with the English firm for six months and returned to Australia in October 1974. The Australian firm paid the fares of the taxpayer and his wife, he had married in Canada, from Toronto to London and from London to Sydney and his salary during his stay in London. The taxpayer has remained with the Australian firm ever since, being promoted to manager on the 1st July 1975.
Several questions are raised by the appeal. Firstly, was the amount paid by the taxpayer for his air fare to Canada, in the words of sec. 51(1) of the Income Tax Assessment Act, 1936-1971 an ``outgoing incurred in gaining or producing the assessable income''. The main consideration is whether other circumstances yet to be related modify what might at first sight seem to be the negative answer required by a break in the taxpayer's employment after leaving Australia. The second question is whether, if the outgoing was of the kind described in the subsection, it was incurred in gaining or producing the income which the taxpayer derived from his employment in Canada. If it was, such income having borne Canadian income tax, would have been exempt income, and the outgoing would be within the exception mentioned in the concluding words of the subsection of outgoings ``incurred in relation to the gaining or production of exempt income''. This question would not arise if, as the taxpayer contends, the outgoings should be seen as incurred in gaining or producing his assessable income after his re-employment by the Australian firm which involved a promotion from the position which he occupied when he resigned.
It is established by the evidence that when the taxpayer incurred the outgoing in question he intended to make his career in accountancy with the Australian firm. He did not subsequently depart from this intention. When he resigned from the Australian firm he was paid his accrued holiday pay but not the moneys to his credit in the superannuation fund to which he was technically entitled. He had accepted the advice given to him by the Australian staff partner that his stay overseas should be for two years, that he should work at the Toronto office of the Canadian firm, and that he should seek to return to the Australian firm's Sydney office. While he was away no contributions were made to his account with the superannuation fund. When he first arrived in Canada he received an offer of employment at double his former salary from a client of his firm which he refused. While there he kept in constant touch by letter with the Australian firm. The taxpayer knows of no one who has been refused employment by the Australian firm on returning from overseas service with one of the other national firms. In a letter to the Deputy Commissioner of the 3rd April 1973 he stated ``As I have previously worked with Price Waterhouse & Co. in Australia and Canada I will naturally approach that firm in the first instance but this does not necessarily mean that I will be re-employed by them or that I would accept employment with them''.
In the same letter he stated the advantages of his employment in Canada in the following words:
``Up to the time of my departure, I was engaged in the field of `audit and taxation' as practiced by a large firm of accountants. At present I am still involved in that same field with more of an emphasis on company audit.
The major purpose in coming to Canada was to gain additional experience and to keep abreast of current developments, in the audit sphere. In addition I had observed that to maintain technical equality with my fellow staff members foreign experience was a necessity.
It is my intention to apply the knowledge and experience that I have acquired and will acquire in Canada in the conduct of my professional vocation so as to maintain my efficiency, status, promotion possibilities, technical competence and management potential. Probably the best way to explain how I foresee my utilizing the additional experience in the accountancy field upon my return to Australia is to provide some examples of modern North American audit practice which I would apply upon return.''
After stating six examples he continued:
``The application of these and other methods and techniques will maintain and enhance my efficiency as a professional accountant and is necessary in order to be a contender in a highly competitive field of endeavour.''
There can be little dispute that this statement of advantages is correct. In relation to the last paragraph quoted the taxpayer's evidence establishes that overseas experience of the kind which he set out to gain in Canada greatly enhanced his prospects of promotion and earning a higher income with the Australian firm. It is, I think, to be inferred from the evidence that his re-engagement in a higher position at an increased salary by the Australian firm and his selection to serve in the staff exchange scheme are to be attributed to the experience which he had gained in Canada as well as to his professional capacity.
There is in evidence the introduction to notes printed for the guidance of those selected in the staff exchange scheme. There it is said:
``By exposing participants in the scheme to accounting and auditing procedures and techniques of countries other than their own and by providing opportunities to develop friendships within the A.B. & Co. organisation throughout the world, the International Firm endeavours to develop the international outlook of the A.B. & Co. organisation and promote the highest calibre of work by its member firms. The International Firm has set down the following goals for the staff exchange scheme:
- (i) To make participants aware of A.B. & Co. as an international organisation and to foster enthusiasm for it in preparation for them assuming more senior positions in their own firms. This is greatly helped by developing friendships with people of other A.B. & Co. firms and gaining experience of different accounting procedures and auditing techniques.
- (ii) To develop the personalities of participants and broaden their horizons by giving them opportunities to live and work in foreign countries.
- (iii) To encourage tolerance in participants and respect for colleagues in A.B. & Co. firms in other countries through an awarness of the different circumstances in which others work.
- (iv) To further the professional development of participants and thereby promote the highest calibre of work throughout A.B. & Co. firms.
- (v) To make participants more searching in their thinking about their own firm's procedures by being aware of different methods and practices.''
It is, I think, to be inferred that the various national firms saw similar advantages to be gained in the case of members of staff who sought employment with other national firms but paid their own fares.
The above are the circumstances in which the first question must be answered. The expression ``in gaining or producing the assessable income'' invites the enquiry ``what was it the taxpayer did to gain or produce the assessable income''. Where the taxpayer gained the assessable income by earning a wage or salary as an employee the expenditure must be incurred in the course
ATC 4410of earning the assessable income by such a means. It is established that the cost of travel from a taxpayer's home to his place of employment is not incurred in so gaining assessable income because he does not start to gain the assessable income until he reaches his place of employment:
Lunney v. F.C. of T. (1957-58) 100 C.L.R. 478. It might be said that the taxpayer earns the assessable income by working rather than going to work. Expenses incurred in seeking employment are, for similar reasons, not incurred in gaining the assessable income:
F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426. Where a taxpayer, in reliance upon the conditions of his employment, spends money to gain a qualification which will have the immediate effect of enabling him to earn more, the expenditure is incurred in the course of gaining the assessable income:
F.C. of T. v. Hatchett 71 ATC 4184, esp. at 4186; (1971) 125 C.L.R. 494, esp. at 498.
I think that it may be concluded from the differing reasons given by the members of the Court in
F.C. of T. v. Finn (1961) 106 C.L.R. 60, that where a taxpayer incurs expense in maintaining or improving his qualifications in a way which is of distinct advantage to his work in the eyes of his employer (p. 67), or pursuant to an implied obligation of progressive acquaintance with a living and developing art (p. 69), the expenditure is incurred in gaining the assessable income. A similar conclusion was deduced by Helsham J. in
F.C. of T. v. White 75 ATC 4018 from Finn's case and Hatchett's case when he said 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''.
The problem presented by the present case is that the expenditure in question cannot be said to have been incurred in any of the circumstances already mentioned as having been considered in the cases. The expenditure was made in the course of carrying out a plan to equip the taxpayer to earn a higher income in the future by acquiring the professional benefits to be obtained by employment in another country. In these circumstances in order to qualify as an allowable deduction there must be seen to be what Menzies J. called in Hatchett's case ``a perceived connection between the outgoing and assessable income'' (ATC 4187; C.L.R. 499). The connection need not, of course, be between the outgoing and assessable income of the year in which the outgoing was incurred: Finn's case, above, per Dixon C.J. at 68; Hatchett's case, above, at ATC 4186; C.L.R. 498. Whether there is such a perceived connection in any particular case is a matter of judgment informed by the criteria established by the cases.
In Hatchett's case one of the deductions in question was for university fees for subjects in the faculty of arts, the taxpayer being a teacher employed by the Education Department of Western Australia. As to these his Honour said:
``The university fees paid were paid with the encouragement of the department; it contributed towards them. This, however, is not, of itself, enough to bring the fees within sec. 51. Enlightened employers often encourage employees to improve their bodies and their minds, and assist them to do so. Such 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?
Here, I am not dealing with the general question whether the payment of university fees can ever afford a deduction from assessable income; I am dealing with the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible. As I have said, I am not able to find any connexion 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 connexion between the outgoing and assessable income. Had the taxpayer paid fees for subjects in the faculty of law, it would, I think, have been obvious that the fees were not allowable deductions. In my view the payment of such fees would have
ATC 4411as much connexion with the taxpayer's assessable income as the fees in fact paid. In the conclusion that the university fees paid are not deductible. I believe that I am supported by F.C. of T. v. Finn (1961) 106 C.L.R. 6 and to that authority I now turn.''
(ATC 4187; C.L.R. 499)
As to the circumstances his Honour had already said:
``The payment of university fees, however, seems to me to fall into a different category. Any relationship between any assessable income of the taxpayer and the payment of university fees is problematical and remote. Having regard to the taxpayer's lack of success in passing university examinations it is not possible to find affirmatively that there exists any connexion between the payment of university fees in 1967 and the earning of assessable income at any time in the future. The prospects of the taxpayer obtaining a university degree leading to his promotion to positions in the service for which a university degree is prerequisite affords no ground for concluding that the Commissioner was in error in refusing to allow the fees paid as deductions. If these fees are deductible it must be on a simpler footing, namely that expenditure upon university study, which the department encourages teachers to undertake, is, without more, incurred in gaining assessable income as a teacher.''
(ATC 4186; C.L.R. 496-7)
It would seem, therefore, that the taxpayer's lack of success in passing university examinations was, to his Honour's mind, a circumstance against establishing the necessary connection between the outgoing and the earning of assessable income. It may perhaps be doubted whether it is relevant in characterising an item of expenditure to enquire whether its object was achieved but that is not a matter on which it is for me to express any view. However, if it is, the achievement of the object of the outgoing in question is a factor which assists the taxpayer in the present case because I infer from the evidence that his promotion and increase in income in April 1974 are to be attributed, to a substantial degree, to his overseas experience to which the outgoing was directed. And, I think, it is also to be inferred that, in the circumstances of this case, the pursuit of overseas experience was inherently likely to result in the taxpayer receiving on his proposed return to Australia promotion and an increase in his salary earlier than he might otherwise have expected.
Each case must, or course, depend upon its own particular circumstances. F.C. of T. v. White, above, was a case in which the circumstances were very different to those in the present case. There a clerk employed by a firm of accountants claimed as a deduction travelling expenses and meals incurred in attending an accountancy course at a technical college, the completion of which would not have entitled him to be registered as an accountant or admitted as a partner in the firm, although it would have benefited him in his employment. Helsham J. held that the expenditure was not within sec. 51 taking the view that there was no sufficient association between the study activities and the taxpayer's employment. In the present case I have come to the conclusion that a sufficient association is established by the evidence. The expenditure was part of a plan pursued by the taxpayer to increase his income from his employment as an accountant by the acquisition of two years' overseas experience with a national firm associated with his Australian employer, at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of his salary in his remaining professional life would be accelerated. These considerations provide, to my mind, the necessary ``perceived connection'' between the outgoing and the assessable income so that it can fairly be said that the outgoing was ``incurred in gaining the assessable income'' of future years in Australia. In reaching this conclusion I rely upon the fact that in April 1974 the taxpayer was promoted and given an increased salary only as a subsequent event confirming that the taxpayer's plan when put into action was reasonably calculated to achieve its object.
This conclusion is sufficient to dispose of the submission put for the Commissioner that the outgoing should be considered as incurred only in gaining the taxpayer's income in Canada and therefore within the exception contained in sec. 51(1) to which reference has already been made.
For the foregoing reasons the appeal is dismissed with costs.