AM Donovan Ch
LC Voumard M
G Thompson M
No. 2 Board of Review
A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members): In this reference the taxpayer, an officer in the Taxation Branch of a State Government Treasury, claims a deduction of $506 for expenditure incurred by him in gaining admission as a barrister and solicitor of the Supreme Court of the particular State concerned. The actual sum paid by the taxpayer was $505.86, of which, somewhat surprisingly, the sum of $420 represented solicitor's costs and counsel's fee relative to the admission. The remaining $85.86 was incurred for out-of-pocket expenses. However, nothing turns upon this division of the outgoings.
2. The taxpayer also claimed the sum of $250 for a proportional concessional rebate in respect of his wife, but abandoned this claim at the hearing before the Board. It is accordingly necessary for the Board to review only his said claim of $506 expended in connection with his admission as a legal practitioner.
3. The taxpayer joined the Taxation Branch of the relevant State Government Treasury Department in May 1972 as a research officer, and subsequently in March 1975 he was appointed a research and prosecutions officer. His annual salary in respect of the latter appointment as at 31 December 1976 was $13,789. Upon his admission as a legal practitioner of the relevant Supreme Court, he was granted an extra duties allowance of $400 per annum with effect from 1 January 1977.
4. On 4 August 1977, which was subsequent to his said admission, the taxpayer was appointed a legal officer and was paid the higher salary of $15,702 per annum. Since the taxpayer was entrusted with legal work of a professional nature, according to the evidence before the Board, it was essential for him to be admitted to practise in the Supreme Court, and he had been advised to seek such admission.
5. His admission as a legal practitioner was an essential qualification for the position of legal officer to which he was appointed. This was so because, in addition to performing research, giving advice and opinions on questions of law, and other legal duties relating to taxation matters, the taxpayer was required to act in court proceedings as directed by the Deputy Commissioner of Taxes.
6. It is quite clear that unless he were admitted as a legal practitioner of the Supreme Court he had no right of audience
ATC 210in that Court, and was unable to appear there in order to perform the duties of his office of legal officer, despite the fact that he could previously appear in the lower court in his role of research and prosecutions officer. Thus, although he was able to perform his duties as advocate on the hearing of complaints in the Court of Petty Sessions, he was unable to appear to perform the duties of legal officer until he had been admitted in the Supreme Court.
7. Some further relevant personal history of the taxpayer on the subject of his qualifications and appointments may now be set forth. The taxpayer deposed that he obtained a Bachelor of Economics Degree in India in 1957, the Degree of Bachelor of Commerce in 1959, and a Bachelor of Laws Degree in 1967, all in India, which was then, for present purposes, regarded as one of Her Majesty's Dominions. He did not practise at the Bar there, but migrated to Australia in June 1970. After working in various Australian States, he came to the State relevant to this reference, and took up his first appointment in May 1972 as abovementioned. This position was temporary, but in October 1973 it became permanent after the taxpayer had assumed Australian citizenship in April of that year.
8. His appointment was reclassified in March 1975 when he became a research and prosecutions officer, with the addition of prosecuting duties added to his list of duties of employment. The taxpayer's subsequent progress so far as is relevant has been described above up to the time of his admission as a legal practitioner of the Supreme Court. Subsequently the taxpayer in the course of his duty made appearances as counsel in the Supreme Court, and also received, firstly, an additional monetary allowance per annum, and finally an increase in his yearly salary, which then became $15,702 per annum.
9. Upon the basis of the foregoing essential facts, the taxpayer submitted that his expenditure of $505.86 incurred in connection with his admission as a legal practitioner of the Supreme Court is an allowable deduction pursuant to sec. 51(1) of the Act.
10. It is pertinent to record that he was qualified to be admitted to practise in the Supreme Court because he was an Advocate of the Supreme Court of one of Her Majesty's Dominions, namely India. However, those qualifications did not entitle him to a right of audience in the Supreme Court. It was still necessary for him to be admitted in the particular Australian State. The crux of the matter appears to us to be whether the outgoings were necessarily incurred in gaining or producing assessable income of the taxpayer within the meaning of the first limb of sec. 51(1) of the Act; and, if so, whether they were capital, or of a capital nature, and consequently are not an allowable deduction.
11. The taxpayer in argument submitted, inter alia, as follows:
``... I maintain that the expenditure of $505.86 incurred and paid by me for the purpose of seeking admission to the Bar in... is an allowable deduction under the provisions of sec. 51(1) of the Act and that it is not a loss or outgoing of capital or of a capital private or domestic nature. In so contending I rely on the decision of the High Court of Australia in
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494. In that case the taxpayer who was a teacher employed by the Education Department of W.A., paid an amount of $89.00 in connection with the submission of theses for the purpose of gaining a Teacher's Higher Certificate. Possession of that certificate was expected to lead forthwith to an increase in his earnings. The taxpayer claimed to be entitled to an allowable deduction of that amount. It was held that the taxpayer was entitled to an allowable deduction of the amount so paid by him. It was immaterial for this purpose that the increase in his earnings that was expected to take place would take place in a year subsequent to the year of that payment. Further it was held that it was wrong to regard the payment as amounting to an outgoing of a capital nature; in the field of taxation the term `capital' is used in contrast with the term `revenue' and it has no reference to a man's body, mind or capacity. The decision in this case was supported by the decision of the High Court in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 which has established a principle that the expenses incurred by an employee in order to equip
ATC 211himself to seek higher responsibility and position in the employment are allowable deductions under sec. 51 of the Act. This principle of law is also confirmed in
F.C. of T. v. White 75 ATC 4018.''
12. The case of F.C. of T. v. Finn (1961) 106 C.L.R. 60, was, of course, a decision of the Full High Court, which preceded Hatchett's case (supra) which was the ruling of a single Justice of the High Court (Menzies J.), and accordingly is binding authority in pari materia. We have carefully reconsidered both these cases cited, and are of opinion that Hatchett's case does not support the argument of the taxpayer in this reference. In the latter case, Menzies J. was dealing with a taxpayer who was a teacher employed by the Education Department of Western Australia, and who ``paid an amount of $89 in connection with the submission of theses for the purpose of gaining a Teacher's Higher Certificate. Possession of the certificate was expected to lead forthwith to an increase in his earnings. The taxpayer claimed to be entitled to an allowable deduction of the amount of $89''.
13. His Honour held that ``the taxpayer was entitled to an allowable deduction of the amount so paid by him. It was immaterial for this purpose that the increase in his earnings that was expected to take place would take place in a year subsequent to the year of that payment. Further, it was wrong to regard the payment as amounting to an outgoing of a capital nature; in the field of taxation the term `capital' is used in contrast with the term `revenue', and it has no reference to a man's body, mind or capacity''. The learned Judge did invoke Finn's case (supra) in support of his reasoning in this respect.
14. It will be observed that Menzies J. was here dealing with a school teacher who incurred expenditure to obtain a Teacher's Higher Certificate in the course of his employment as a teacher. It did not involve the attainment of a higher status as such, but, as his Honour said: ``The taxpayer, in reliance upon the conditions of his employment, spent money to earn more''. Accordingly, his Honour held that the outgoings were incurred in gaining assessable income and were deductible. We are of opinion that the present reference, involving as it does the acquisition of a higher status by the taxpayer, namely that of an admitted legal practitioner of the Supreme Court, is distinguishable from the case before Menzies J.
15. Hatchett's case further concerned another issue, namely that of university fees expended for subjects in the Faculty of Arts. The headnote of this part of the case, as reported in (1971) 125 C.L.R. 494, will provide a sufficient summary:
``In the same year the taxpayer paid an amount of $90 as university fees for subjects in the faculty of arts. As to $19 of these fees he was reimbursed by the Education Department. The taxpayer claimed to be entitled to an allowable deduction of the amount of $71.
Held, that there was not a sufficient connexion between the making of the payment and the gaining of assessable income to give rise to an allowable deduction. It was not sufficient that a teacher who had pursued university studies was likely to become a better teacher thereby and therefore more likely to obtain promotion.''
We also draw attention to the summary and report of this case cited as F.C. of T. v. Hatchett in (1971) 2 A.T.R. 557. In effect, in this part of the case Menzies J. found that there was insufficient nexus between the expenditure and the gaining of assessable income so as to characterise it as an allowable deduction, for the reasons given in the remainder of his judgment.
16. In the premises, we consider that Hatchett's case does not assist the taxpayer in this reference. We also hold the opinion that the reasoning of the Full High Court in Finn's case militates against the taxpayer rather than in his favour. There the taxpayer, Mr. Finn, was already qualified as a senior design architect and incurred his expenditure by devoting all his available time to the advancement of his knowledge of architecture and to the development of his architectural equipment, outlook and skill. In that case there was no question of gaining an additional professional qualification or higher status, as was the case with the present taxpayer, who was incompetent to accept his higher appointment unless he incurred the necessary expenditure to be admitted as a
ATC 212legal practitioner of the Supreme Court. The judgments of their Honours of the High Court in Finn's case have been analysed frequently before, and without embarking upon a further exegesis of the subject, we are content to observe that to our satisfaction the taxpayer has not brought himself within the purview of the reasoning of the Full High Court.
17. The case of F.C. of T. v. White 75 ATC 4018, to which reference has been made, concerned a taxpayer who:
``was employed by a firm of chartered accountants as an intermediate clerk. Prior to that date, while in other employment, he had commenced an accountancy certificate course at night at technical college. He continued the course when he began his employment in 1971, although by that time, the content and the name of the course had changed.
The evidence established that the accountancy course was of general relevance to taxpayer's employment but there was no agreement with his employer that the completion of the course would lead to any promotion or increase in salary. The senior partner of the firm gave evidence that taxpayer was expected to undertake some studies to try to further his position and that if he had not carried out some studies, he would not have been able to maintain his position in the firm and others would have passed over him.
For the year ended 30th June 1973, taxpayer claimed a deduction for travelling expenses and meals incurred in substance in going from his place of work to classes in the evening and then to his home. The Commissioner disallowed both claims and on review, the Taxation Board of Review No. 1 upheld taxpayer's objection with respect to travelling expenses. The Commissioner then appealed to the Court''
(at p. 4018).
18. Helsham J. allowed the appeal and held that (at p. 4018):
``1. The decisions in F.C. of T. v. Finn (1961) 106 C.L.R. 60 and F.C. of T. v. Hatchett 71 ATC 4184, establish 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, i.e. 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.
Further, it is not enough 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 so to obtain promotion, even if encouraged by his employer. Nor is it enough that without undertaking a course of study encouraged by his employer a person may not be able to improve his position in his employment. There is nothing more than this in the present case and it is not sufficient to enable the travelling expenses to be claimed as outgoings incurred in gaining or producing assessable income.
2. Expenses incurred in gaining an initial qualification may qualify for deduction where the necessary connection between the expenditure on study and the earning of assessable income can be shown.''
19. His Honour in White's case also dealt with a particular argument pressed on behalf of the Commissioner (at 75 ATC 4022-3) in these words:
``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
ATC 213expenditure 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.''
20. We should also notice a further passage in the argument of the taxpayer where he made a further submission expressed in these words:
``In further support of my contention I would refer to a recent decision of the Supreme Court of N.S.W. in
F.C. of T. v. Smith (1978) 8 A.T.R. 518. In that case the taxpayer an officer of the Taxation Department decided to enter the field of assessment. He was able to gain acceptance by enrolling for a part-time course at the University which was a practical necessity to qualify for higher grade appointments and the subjects in his course were either necessary or of advantage in carrying out his duties or appropriate to the proper discharge of his duties. It was desirable to so equip an officer of the Department dealing with varied and difficult problems. It was held that the taxpayer was entitled to the deduction under sec. 51(1) of the Act in respect of the expenses incurred in connection with his pursuit. The circumstances of the case established a connection between the expenditure and the assessable income in the sense that the undertaking of the course was reasonably calculated to lead to an increase in his income for future years, to confirmation of his salary range, to an immediate increase in his salary and also to future increases which in fact occurred.''
21. In addition, the taxpayer sought vigorously to distinguish the majority decision in Case J30,
77 ATC 282 upon which the Commissioner placed reliance in argument. In that case the Board had to decide the reference of a taxpayer who ``claimed a deduction for fees paid by him to gain admission as a solicitor of the Supreme Court. Prior to his admission he was paid $80-$100 a week as a law clerk. After his admission, he continued in the same employment performing the same duties but was paid a salary of $140 a week. In support of his claim, the taxpayer relied on the decision of Menzies J. in F.C. of T. v. Hatchett 71 ATC 4184''.
22. By majority the Board disallowed the taxpayer's claim on two grounds, namely, that the expenditure was incurred at a point too early in time to come within the ambit of sec. 51(1) of the Act, and secondly, that it was capital or of a capital nature.
23. The taxpayer sought to distinguish Case J30, and in argument submitted that:
``(a) The taxpayer in that case was not already a qualified practitioner and his admission in the circumstances of that case could be regarded as personal enrichment.
(b) It was not essential for that taxpayer to seek admission for the purpose of performing the duties of his then existing position.
(c) The expenditure claimed in that case was an expenditure incurred in seeking a solicitor's profession and work.
(d) In that case the evidence was that although the taxpayer's income jumped up following his admission, his work and his responsibilities in that position remained the same while in my case not only there was an increase in my salary but also the nature of my duties and responsibilities as well as the title of my office was altered following my admission to the Supreme Court.''
24. We have taken all of the above submissions into account, but we do not find it necessary for our decision in this reference to pronounce finally upon all points raised. We take this course because on the whole of the evidence and argument we have come to the conclusion that the expenditure claimed by the taxpayer is of a capital nature, and is thus excluded from the category of an allowable deduction under sec. 51(1) of the Act.
25. In summary we find that although the taxpayer had been previously admitted as an advocate, or legal practitioner, in the High Court in India, he did not occupy the status of a legal practitioner who was qualified to appear in the Supreme Court in Australia. It was essential for him to gain admission as a legal practitioner in the Australian State concerned before he could be regarded as a barrister and solicitor there in order to enable him to appear, and to conduct litigation on behalf of his employer in that Court.
26. Upon his admission he achieved the new status of a duly qualified legal practitioner, which entitled him to take up his appointment of legal officer with the concomitant advantage of being able to command an additional allowance and higher salary. In our opinion, he thereby acquired an asset of enduring benefit, which answers the description of a capital asset or an asset of a capital nature. Not only did the taxpayer by his admission as a legal practitioner equip himself to earn a higher income and to achieve a higher status as an employee, but he also at the same time secured unto himself the right to enter private legal practice with all of its probable future benefits and advantages.
27. Accordingly, we rest our decision upon our conclusion that the expenditure claimed was of a capital nature, and must be disallowed.
28. We therefore affirm the decision of the Commissioner to disallow the taxpayer's objection relating to each of his claims for the said expenditure of $506, and the proportional concessional rebate of $250 which was abandoned at the hearing, and confirm the Commissioner's assessment.