Pearce v. Federal Commissioner of Taxation.Judges:
Supreme Court of South Australia
Sangster J.: This is an appeal, pursuant to sec. 196 of the Income Tax Assessment Act 1936-1975, by a taxpayer from a decision of the Taxation Board of Review No. 2.
The taxpayer lodged a return of income derived by him during the year 1 July 1972 to 30 June 1973. Among the deductions claimed by him were ``educational expenses'' in respect of -
daughter aged 11 Klemzig Primary School $61.40 daughter aged 10 Klemzig Primary School $56.66 daughter aged 8 Klemzig Primary School $46.95 son aged 4 Klemzig Kindergarten $75.76
Details annexed to the return included the following:
``Purchase of Encyclopedia and Childcraft because eldest two children could not manage their homework and some other school work without them.
Projects were given in large numbers and impossible with four young children to go running into public libraries at short notice. They are not reference books and are quite different to Encyclopaedia Britannica. Designed especially to interest children and enable them to grasp and remember their school work. After reading the cases reported on this subject there is no doubt that these books qualify for deduction as being needed for child's full time education at school.''
and ``one quarter share (of instalments paid)'' was ``appropriated to each child'' with a footnote ``Alternatively appropriate 1/3rd to each child at present using the books''. The amounts shown on the return itself included $36.00 for each child in respect of the books referred to in the annexure.
The Commissioner assessed the taxpayer to tax, disallowing the taxpayer's ``claim for deduction for encyclopaedia and childcraft... $144''. The taxpayer lodged with the Commissioner an objection in writing - some four-and-a-half foolscap pages of close typing of which some two-and-a-half pages are devoted to extolling the virtues of the World Book Encyclopedia - against the Commissioner's disallowance of the $144.00. The general tenor of the taxpayer's basis of objection may be seen from the following passages in his objection:
- Page 1. "... that the expenditure was necessarily incurred in the education of my children because they cannot cope with the school work set for them without having access to those books. The access must be readily available without having to spend time going to a library, for two reasons:
- (a) Projects are often required to be done within a week or two.
- (b) With four children and numerous Church and office commitments it is impossible to spend time going to a library when projects are needed.
- In addition to the projects of the length envisaged in the above paragraph there are numerous tasks and work allotted to my children for most weeks of the school year for which they must as the matter of necessity refer to reference books quickly that particular night."
- Page 4. ``Quite clearly, the World Book Encyclopedia is as much necessary to our children as the blank sheets in their homework book on which they write a synopsis of what they look up in the encyclopedia for homework at night. It is much more necessary than a school uniform and is more worthwhile than any one text book that they use in any one year.''
The objection dealt also with the ``Child Craft'' books, but whilst that part of the taxpayer's objection was not withdrawn I do not regard it as now seriously maintained and I will say no more about it.
The Commissioner disallowed the objection, and the taxpayer, in writing, requested the Commissioner to refer the Commissioner's decision to a Board of Review.
The Taxation Board of Review heard the reference at Adelaide on 15 and 16 April 1975 partly on written material and partly on oral evidence, and on 1 October 1975 that Board upheld the Commissioner's decision: each of the three members of the Board published his own reasons.
The taxpayer's appeal to this Court came on for hearing before me on 27 September 1977. It was made clear to me at the outset that, whatever I might decide, the unsuccessful party would seek (and, so far as one may forecast a decision of another Court, probably obtain) leave to appeal to the Federal Court of Australia. The money directly involved is comparatively trifling - on my calculation about $79.00 in tax on this appeal, and potentially a similar amount for a further year and a lesser amount for a third year. The money so involved obviously is not the motivation for the appeal, and I was not informed what the motivation is. I note, however, a reference in the papers to the taxpayer's wife being a saleswoman for the World Book Encyclopedia. I readily acceded to the taxpayer's request to reserve for the consideration of the Full Court of the Federal Court of Australia a question of law settled by me in consultation with counsel for both parties. That reservation proved, in the judgment of that Court, to be ill-founded: see judgment of that Court delivered on 20 April 1978 and the separate reasons of Bowen C.J., Brennan J. and Deane J. The case is, therefore, once more before me - in all probability on its way again, but this time by a different route, to the Full Court of the Federal Court of Australia. I am conscious that my findings of fact are rendered difficult by my having seen only one of the witnesses and by being confronted by a mere transcript of other witnesses' evidence, including passages which are incredible on the face of them: compare the situation in
McCormack v. F.C. of T. (High Court, 5 April 1979,79 ATC 4111: I note particularly - per Barwick C.J. at p. 4116 (speaking of the role of a Supreme Court on appeal from a Board of Review in which the Supreme Court did not itself see and evaluate the witnesses):
``It was for the Supreme Court, in the circumstances, itself to decide whether the appellant and her husband were witnesses of truth, and whether or not upon all the evidence an inference of the requisite purpose should be drawn.''
(and of the role of the Full Court of the Federal Court of Australia)
``The appellant appealed to the Federal Court. There Mr. Justice Deane, who wrote the leading judgment, examined the evidence in order to decide whether he believed the appellant. His Honour recognised that the central question was the credit to be afforded the appellant's testimony. He examined the transcript of the evidence before the Board of Review and pointed to what he regarded as inconsistencies and to what he thought were improbabilities. He concluded that the appellant should be not believed.
But the dominant element was missing, namely, the impression of the appellant as she gave her evidence. Nothing she said as to her purpose was, in my opinion, inherently incredible, whether or not one accepted her explanation of the earlier transactions.''
At p. 4117 Barwick C.J. was critical of the parties ``allowing the matter to be judged'' in the Supreme Court ``on the transcript of the proceedings before the Board of Review''.
Per Gibbs J. at pp. 4122-23.
Per Jacobs J. at pp. 4130-33.
I am also conscious that my findings of fact, lacking the advantage, usually enjoyed by a trial judge, of seeing and hearing all the witnesses, will carry less weight on appeal than is usually accorded the findings of a trial judge.
In all, therefore, I find this case most unsatisfactory, and anticipate that the task of writing this judgment may well turn out to be an exercise in futility. I shall, nevertheless, give it my full and proper attention.
I find the facts to be as follows, and, where appropriate, I give reasons for my findings -
1. The taxpayer, in the year of income in question, was the father of the following student children under the age of 21 years, namely:
- (i) daughter Carolyn born January 1963
- (ii) daughter Jillian born July 1964
- (iii) daughter Lisa born September 1966
- (iv) son Andrew born March 1969.
2. Three of those children were engaged throughout that year of income in full time education at the Klemzig Primary School, and one of them was engaged for half of that year of income in full time education at the Klemzig Kindergarten, and for the other half of that year of income in full time education at the Klemzig Primary School as follows:
July February to to Student child December June Carolyn Grade 5 Grade 6 Jillian Grade 4 Grade 5 Lisa Grade 2 Grade 3 Andrew Kindergarten Grade 1
3. In July 1972 the taxpayer's wife agreed to buy from Field Educational Enterprises a set of books called the World Book Encyclopedia and to pay the purchase price by an initial deposit of $12.00 and by monthly instalments of $12 per month commencing in August 1972.
4. One of the taxpayer's wife's purposes in entering into that agreement was that the books so to be acquired be available to the children in connection with their education.
5. Another of the taxpayer's wife's purposes in entering into that agreement was to provide herself with potential additional benefits as a saleswoman for Field Educational Enterprises by being an owner of a set within twelve months of making sales to other persons.
6. The taxpayer and his wife orally agreed in July 1972 that the taxpayer would buy and his wife would sell to him the set of books which she had agreed to buy from Field Educational Enterprises.
7. The taxpayer -
- (a) orally consented to his wife's entering into the agreement to purchase the set of books.
- (b) orally consented to his wife's becoming a saleswoman for Field Educational Enterprises.
- (c) provided out of his own proper moneys the $12 deposit and each subsequent instalment of $12 per month.
8. The taxpayer's wife from about August or September 1972 engaged in selling World Book Encyclopedia, and earned money from such activities.
9. At all material times the taxpayer's student son Andrew was too young to use, and engaged in studies too elementary to involve his using, the World Book Encyclopedia for or in connection with his full time education at a school.
10. At all material times all three of the taxpayer's student daughters were old enough to use, and engaged in studies sufficiently advanced to involve their using, reference material such as is found in the World Book Encyclopedia, and each of the three of the taxpayer's student daughters did use, throughout (or virtually throughout) the income year in question, the copy of the World Book Encyclopedia purchased by the taxpayer's wife, and that use by each of them aided each of the taxpayer's student daughters in their full time education at the Klemzig Primary School.
11. The purchase of the World Book Encyclopedia by the taxpayer from his wife did not result in, nor did it in any way affect, the provision of books for the use of the taxpayer's student children, nor the use by any of the taxpayer's student children of any of the books. My reasons for that finding are that the books were provided by the taxpayer's wife's purchase of the books: the taxpayer's wife - and the taxpayer - regarded her purchase as genuine and bona fide: the taxpayer's wife - with the taxpayer's knowledge and consent - derived or qualified to derive benefits from Field Educational Enterprises by reason of her ownership of the books: the change of ownership between the taxpayer's wife and the taxpayer was for some purpose other than the provision of the books for the use of their children (for that purpose had already been achieved): the probable purpose of the transaction between the taxpayer and his wife was to enable the taxpayer to claim the deduction now in question whilst enabling his wife to qualify for benefits from Field Educational Enterprises as the owner or apparent owner of the books.
12. The Klemzig Primary School, at all material times, had a school library comprising a number of books and including the 1968 edition of the World Book Encyclopedia, the set called ``Child Craft'', the 1953 edition of Richard's Encyclopaedia, the 1960 edition of the Oxford Junior Encyclopaedia, and a series called ``Knowledge''.
13. The school library was, during school days at all material times, open to students before school, during part of the lunch break, and after school, and during a half-hour library session by each class each week: the school library was under the charge of a full time librarian: at times the World Book
ATC 4199Encyclopedia would be taken to a classroom for the use of a particular class: books (including single volumes of encyclopaedias) were sometimes available to be borrowed and taken home by student children.
14. At all relevant times the progress of children at the Klemzig Primary School including grades 2 to 6 was assessed on their total marks in subjects ranking within the maxima possible as follows:
social studies 20% mathematics 20% oral reading 10% reading comprehension 10% spelling dictation exercises 10% composition 10% English 10% handwriting 10% ---- 100% ----
and the 20% for social studies was subdivided according to the discretion of the particular teacher, but out-of-class (including home) assignments counting for not more than one quarter of that 20%.
15. At all relevant times the choice of topics for out-of-class assignments was made by the particular teacher, but within a list of topics for each of which topics the school library provided sufficient reference material.
16. At all relevant times the school library provided sufficient reference material and in sufficient numbers of copies for all student children to find all their reference material from within the school's own facilities.
17. It was not necessary for parents or guardians to provide any reference books for use by their student children.
18. The school did not recommend that parents or guardians provide any reference books for use by their children.
19. The provision of reference books by parents or guardians for use by their student children would not necessarily advance the progress of those student children beyond the progress available to them within the school's own facilities but would:
- (a) be sometimes more convenient for the student child than using the school's copies of the same books either at school or by borrowing to take home;
- (b) be more convenient for a parent or guardian wishing to assist or supervise his or her student child's use of such reference material.
20. In the year of income the taxpayer's wife incurred expenditure amounting to $144.00 in part payment of the price of books provided by her for purposes which included that the books be used, and the books were in fact used, by her and the taxpayer's three student daughters as an aid to their studies as full time students at the Klemzig Primary School, but neither she nor the taxpayer were under any compulsion or pressure to incur that expenditure or provide those books.
21. In the year of income the taxpayer incurred expenditure amounting to $144.00 in a husband-and-wife transaction which did not have as its purpose, or one of its purposes, the provision of books for use by their student children.
In arriving at these findings I have rejected so much of the evidence (as appears from the transcript) given by the taxpayer before the Board of Review as conflicts with the evidence given before me by Mr. Lawrence, Deputy Principal of Klemzig Primary School. I accept Mr. Lawrence as a witness of truth, and his evidence was positive and supported by details, against the taxpayer's general assertions, particularly when he purported to negative matters not within his own knowledge, such as the availability of books at and from the school.
The deduction was sought on the basis that the expenditure in question constituted ``education expenses'', defined by sec. 82J(6) as ``expenses necessarily incurred by the taxpayer for or in connection with full-time education at a school'' namely the Klemzig Primary School.
The appellant's claim must fail, whatever my view of the respective bases upon which, on the one hand, the appellant seeks to sustain his claim, or, on the other hand, the Commissioner seeks to sustain his rejection of it. The reason for this is that the appellant incurred his expenditure not in the provision of books for the use of his student children but in a husband-and-wife financial and property transaction which in no way affected the place where the books were then, or were thereafter to be, kept, nor the
ATC 4200persons who had, or were thereafter to have, access to those books. Whatever one might have said as to the expenditure incurred by the appellant's wife, or as to the provision or use of the books, is therefore inapplicable to the expenditure incurred by the appellant.
Counsel for the Commissioner said plainly that the Commissioner did not take this point, but it is my duty to find the facts and to apply to the facts as I find them the law in accordance with my opinion of the law: if that process results in the conclusion that the appellant's claim fails then I cannot arrive at a contrary conclusion merely because the Commissioner did not put his argument that way: there are neither formal admissions of fact affecting the point nor consents as to what judgment I should enter. It so happens, however, that even upon the respective bases upon which the parties argued the appeal my conclusion favours the Commissioner.
The case was argued before me partly as though I have a choice, in reaching my opinion on the law, between two conflicting views expressed by members of Taxation Boards of Review, namely: -
(1) those applying to sec. 82J what was said to be the reasoning of the High Court of Australia in cases relating to sec. 51(1) namely that in the latter section ``necessarily incurred'' means ``clearly appropriate or adapted for'': see -
Ronpibon Tin NL v. F.C. of T. (1949) 78 C.L.R. 47 per curiam at p. 56.
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1951-1952) 85 C.L.R. 423 per Williams J. at p. 429: Williams J.'s decision was affirmed on appeal but this topic was not mentioned in the judgments on the appeal.
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431. See however per Dixon C.J. at pp. 436-437:
- ``The word `necessarily' does, however, seem to me to require consideration. Clearly its operation is to place a qualification upon the degree of connexion between the expenditure and the carrying on of the business which might suffice in the absence of such a qualification. In The Commonwealth and The Post-Master-General v. Progress Advertising & Press Agency Co. Pty. Ltd. Higgins J. supplied an interpretation of `necessary' as not meaning essentially necessary but as meaning appropriate, plainly adapted to the needs of a department carrying out an Act. That was in another connexion but the phrase was availed of by the Court in the Ronpibon Tin case as throwing light on the use of the word `necessarily' in sec. 51(1). Clearly the expression is used in relation to business. Logical necessity is not a thing to be predicated of business expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.''
- Case P49,
(1963) 14 T.B.R.D. 225 per member Mr. Davies at pp. 227-228.
(2) those reading the word ``necessarily'' in sec. 82J as meaning just that.
- Case G1,
75 ATC 1 per member Mr. Todd at p. 7:
- ``9. There seems to me to be no reason why in the case of sec. 82J(6) the word `necessarily' should receive other than its ordinary meaning which I take as being `unavoidably'. What is required is objective necessity in relation not to an end or purpose, as in sec. 51(1) (as to which see the last sentence in the above citation from the judgment of Dixon C.J. in Snowden & Willson Pty. Ltd. v. F.C. of T. (supra)), but rather in relation to a fact, that is expenses incurred for or in connection with full-time education at a school, etc.''
- Case G64,
75 ATC 463 (the decision from which this appeal was brought).
The view that these are the alternatives is put by the editor of ``Revenue Note'' (Mr. I.V. Gzell) in 49 A.L.J. 148-149 (March 1975).
The arguments put to me on behalf of the Appellant included the following: -
- (i) The expression ``necessarily incurred'' when used in different parts of the same Act (e.g. sec. 51(1) and 82J(6)) should be interpreted as having the same meaning.
- (ii) The expression ``necessarily incurred'' as appearing in sec. 51(1)
ATC 4201having been interpreted by the Courts in 1949 and 1951 - see the Ronpibon and Broken Hill Theatres cases above - as meaning ``clearly appropriate or adapted for'', the repetition of the same expression in the same Act in 1953 involves the adoption by the Legislature of that judicial interpretation.
I do not find either argument persuasive, nor, indeed, do I agree that my choice is limited to alternatives already mentioned. In my opinion counsel, in their arguments, have strayed too far from the proper starting point - the actual words of the statute in the context found in the statute - and by routes too devious - a suggested interpretation of two words of one section by application of judicial comments in the course of interpretation of another, but quite different, section where the same two words appear. I prefer the good old-fashioned approach of reading the whole section (82J) in its setting in the Income Tax And Social Services Contribution Assessment Act (Part III - Liability to Taxation, Division 3 - Deductions, Subdivision B - Concessional Deductions), asking myself whether those words are plain and unambiguous, and only if those words are not plain and unambiguous having resort to the canons of constructions and to the further enquiry whether I am compelled or persuaded by judicial authority, or persuaded by authors, to a particular solution of any remaining difficulty.
The key word is ``necessarily'', and its ordinary meanings, according to Murray's New English Dictionary (``O.E.D.'') 1961 Reprint include:
- 1. (a) ``By force of necessity; unavoidably'' (obsolete).
- (b) ``As a necessary aid or concomitant; indispensably'' (obsolete).
- (c) ``By a necessary connexion'' (both rare and obsolete).
- (d) ``In accordance with a necessary law or operative principal'' (obsolete).
(These senses are now merged in No. 3 below.)
- 2. ``As a necessary result or consequence''.
(This sense is inapplicable to my present task.)
- 3. ``Of necessity; inevitably''.
The key meaning for my present purpose is thus ``of necessity'', and that breaks the enquiry down into two questions -
- (i) what is the ``necessity'' (for the incurring of the expenditure in question)?
- (ii) how is that necessity to be determined - objectively (i.e. so that its very existence in any given case may not be finally ascertained until all rights of appeal are exhausted) or subjectively (i.e. so that the opinion of some person or persons is the test) or a combination of each?
Even ``necessity'' has no single, rigid, meaning - it may be differentiated as absolute, conditional, logical, moral, natural, philosophical, physical. (O.E.D. above).
``Necessity'' is defined (see O.E.D. above) as including:
- 3. ``The constraining power of circumstances: a condition or state of things compelling to a certain course of action''.
- 4. (a) ``Necessarily, inevitably, unavoidably''.
- 7. (b) ``An imperative need for or of something''.
- 8. ``The fact of being indispensible...''
In their primary meanings it seems clear to me that the word ``necessarily'' or the phrase ``of necessity'' imports at least some element of need (for the expense in question). In the context and setting in which the phrase ``necessarily incurred'' appears in sec. 82J, such a need must go beyond what is required by other words (e.g. ``for or in connection with full-time education, at a school'') of the section. One can imagine prudent parents, to whom the virtues of the encyclopaedia in question had been extolled, saying ``Yes - it would be useful for the children and would help them with their homework but do we need to have it in the house when the children can take their turn to use another copy at school or sometimes borrow one from school?'' The cases (see above) on the expression ``necessarily incurred'' as used in sec. 51(1) appear to me to indicate a
ATC 4202combination of subjective and objective tests - within some objective limits, i.e. the limits of sufficient connection with the ``carrying on of a business for the purpose of gaining or producing'' assessable income, a connection described, as I have mentioned, as ``clearly appropriate or adapted for'' the purpose, the test is subjective - i.e. the necessity is left to the businessman to decide. The cases, on sec. 51(1), to which I have referred appear to me to rest heavily on considerations of the nature of business operations and expenditure in the hands of free enterprise, and on the impossibility of applying any concept of absolute necessity to any particular item of business expense, or any practicable formulation of conditional necessity.
In my opinion, if there is to be found any analogy between sec. 51(1) and 82J, it lies in the combination of some objective limits and the subjective test of the opinion of those running the business or school. In the cases on sec. 51(1) the objective limits have been held to be those already mentioned: the subjective test, to be applied within those limits, is the choice of the businessman. Beyond that I find no assistance from the cases on sec. 51(1).
Section 82J in its earliest form was introduced in 1952 and (so far as is relevant to my consideration of the present case) provided an allowable deduction for ``amounts paid by the taxpayer... to a school... for or in connection with the education of'' his student child. In that form the objective limits were wide - anything ``for or in connection with the education'' - but the subjective test was, in effect, whatever the school sought from the parents for those purposes. In 1953 the section was re-enacted, introducing the words relevant for my present purposes by providing for an allowable deduction for ``expenses necessarily incurred... for or in connection with the full time education, at a school,...'' of the taxpayer's student child. Part of the objective test remained the same i.e. ``for or in connection with... full time education, at a school,...'' but no longer was the allowable deduction limited to amounts paid to the school. Whilst in its earlier form the school's charges were not restricted by the words ``necessarily incurred'', now that the section relates to payments to the school or to anyone the Legislature has in my opinion clearly indicated that, on the one hand, the choice of what expenses will be incurred is to be made either by the school or by the taxpayer, but that, on the other hand, that choice is to be limited to expenses for which a necessity can be shown. In my opinion such necessity has become part of the objective test.
It is, in my opinion, neither essential nor desirable for a judge of first instance - particularly a judge of a court which is not the principal arbiter in this jurisdiction - to say anything on the law beyond what is necessary for his decision on the facts before him.
In my opinion - whatever definition of the words ``necessarily incurred'' (as used in sec. 82J) might be attempted elsewhere - the provision of the World Book Encyclopedia in the appellant's home for use by his student children lacks any relevant necessity, and had the appellant himself incurred the original expense of so providing those books that expense would not have been ``necessarily incurred''.
The appeal must therefore be dismissed. Although only a trifling amount of tax is involved in this, the second and probably not the last, resort to a tribunal, I see no reason why the appellant should not pay the Commissioner's costs to be taxed.