Federal Commissioner of Taxation v. Highfield.

Lee J

Supreme Court of New South Wales

Judgment date: Judgment handed down 23 September 1982.

Lee J.

On 28th September 1975 the respondent, Dr. Highfield, who at the time was carrying on a general practice as a dentist in Sydney, travelled to London in order to secure the degree of Master of Science in Periodontics at the University of London. Periodontics relates to the treatment of diseases associated with the supporting structures of the teeth, that is the gum, the bone that supports the teeth and the surrounding tissues. The course took a year and he was successful in obtaining the degree. He returned to Sydney mid-September 1976.

In his return of income for the year ended 30th June 1976 he made a claim for deduction of outgoings under sec. 51(1) of the Income Tax Assessment Act 1936 (as amended) as follows:

      United Kingdom study costs           544.00
      Living away from home
      expenses                             994.50
      Air fare to U.K. and return         1550.00
      Meals                                931.60
      Examination fees                      42.50''

The Commissioner disallowed the claim (with the exception of $250 allowed as a rebate under sec. 82A(1) and sec. 159U and 159N) and assessed income tax payable accordingly. Objection was filed to the assessment by the respondent's accountants as follows:

``We wish to object on the following grounds:

  • 1. The disallowance of $4,062 overseas travel expenses, being an assessable expenditure in earning assessable income.
  • 2. (This is not relevant to the present proceedings.)''

I mention at this point that the curious form of the objection is of no consequence in the present case and the parties have treated it as amounting to a claim that the expenditure was incurred ``in gaining or producing the assessable income'' within sec. 51(1) of the Income Tax Assessment Act 1936, as amended.

The matter in due course came before Taxation Board of Review No. 1 and the Board by majority upheld the objection and allowed the deduction (Case N69,
81 ATC 358).

The Commissioner then appealed to this Court against the Board's decision. I should mention at this point that the notice of objection filed taken with a letter subsequently written by the respondent's accountants to the Commissioner could be taken as an assertion that the expenditure was being claimed to have been incurred in gaining income as a senior lecturer in periodontics at Sydney University, a position to which the respondent was appointed on his return from London. The Commissioner

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(although relying upon it was throwing doubt on the plaintiff's evidence in certain respects) has not sought to put this construction upon the notice of objection and the case has proceeded upon the footing that the relevant assessable income is that earned or to be earned from the practice of dentistry by the respondent.

Counsel for the respondent has contended that the proper conclusion from the evidence is that the respondent incurred the expense in going to London for the sole purpose of acquiring additional knowledge in periodontics, so that he could do additional periodontic work in his practice and earn more income. Counsel for the respondent concedes that the conclusion is open that the respondent had in mind, in going abroad, that obtaining the degree would enable him in due course to consider practising as a specialist in periodontics, but there was no certainty as to when that might become possible, and the intention to carry on the practice as a general practice after his return has formed the foundation of counsel for the respondent's contention that the expenditure was deductible. The Commissioner, on the other hand, has contended that the respondent is not to be accepted in his assertion as to his motives for going abroad and attending the university and that the proper conclusion from all the evidence is that the respondent had made up his mind when he left for London to give up general practice and that he had decided to get the degree, acquire the necessary practical experience and then specialise in periodontics. Periodontics is a specialty in dentistry and a person registered as a periodontist is required to limit his practice to periodontics. The view which I have taken of the evidence is that the respondent in setting off to acquire the degree considered that it would enable him to do more periodontic work in his general practice, which he would carry on and expand until circumstances might be favourable for him to take up practice as a specialist.

As the Commissioner does not accept that the respondent had any intention of using the benefits of the knowledge acquired in obtaining the degree in his general practice or that the additional knowledge had any bearing upon the receipt of income from the general practice it is necessary to refer in some detail to the evidence.

The respondent filed an affidavit and the following is a summation of the essential details set out therein:

The respondent graduated from Sydney University in 1965 with the degree of Bachelor of Dental Surgery with first class honours. He obtained distinction in periodontics. After a year as a demonstrator in the Department of Operative Dentistry he went to the United Kingdom where he practised as a dentist until August 1968. The practice included work in periodontics. He then went to Canada where at the University of Toronto he obtained the degree of Doctor of Dental Surgery which required an examination in clinical periodontics.

From June 1969 to December 1971 he carried on a private practice as a dentist in Petersborough, Ontario, and was a member of the honorary dental staff of two hospitals in Ontario.

In his practice as a dentist in Canada he did periodontal work.

He returned to Australia in January 1971 and immediately purchased a dental practice at 185 Elizabeth Street, Sydney. He obtained a lease for three years with an option to renew for three years and he exercised that option. In 1974 he entered into a new lease for three years with a further option for three years.

In about mid-September 1974 he took a lease of rooms adjacent to those in which he carried on his practice. A doorway was put in to give connection between the two premises; he moved his laboratory into these rooms and made an additional surgery keeping a large area vacant for future expansion.

The respondent's general practice involved what he referred to as ``a significant amount of periodontic work''. He described his practice as ``essentially a general practice with a leaning towards periodontal aspects'' (p. 34). He estimated that it was about twenty per cent of the whole of the work. This periodontic work involved surgical treatment but it was not as advanced as the type of surgical treatment done by specialist periodontists.

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The respondent found that it was necessary for him to refer patients to specialist periodontists where the treatment was beyond his own capabilities.

Whilst carrying on his practice, the respondent pursued his interest in the periodontic side of dentistry by taking a position as a part-time tutor in periodontics at Sydney University and he held this position until 1976.

By 1974 he had reached a stage of general dissatisfaction with the extent of his capabilities in the periodontics area and he wrote on 20th September 1974 to the Registrar of the Dental Board of New South Wales enquiring whether the obtaining of the Master of Science in Periodontics at the University of London would be accepted as sufficient qualification for registration as a specialist periodontist. The Board informed him in writing of the requirements for specialist practice. The Commissioner called as a witness Professor Martin, the Dean of the Faculty of Dentistry and Professor of Preventive Dentistry at the University of Sydney and he gave evidence that the respondent had approached him before going to London and enquired of the requirements of the Board in regard to practice as a periodontist and Professor Martin confirmed that there were no means of obtaining a suitable degree in Sydney, and that the London degree was appropriate as part of the higher qualification for practice in periodontics. Professor Martin informed him - and this accords with the requirements of the Board for specialist practice - that he would need an additional period of two years' experience in periodontology in addition to two years in the Masters course. Part-time work with a specialist in ``periodontics'' is of course an obvious way of obtaining such experience. The respondent himself said that it was his understanding that he would need four years or the equivalent part-time of four years' experience ``in the field''. It was his understanding that that could include time spent practising periodontics in his general practice but Professor Martin indicated that generally speaking such experience would not count. Another way of achieving the special experience required was to become a full-time tutor at the University. No arrangement at that time, however, was made for the respondent to take such a position.

It is quite clear from Professor Martin's evidence that the discussion with the respondent related to the requirements of practice as a periodontist but Professor Martin also made it clear that the respondent's intentions for the future, so far as continuing to carry on his general practice was concerned, were not discussed.

The respondent on 19th September 1975 entered into a lease agreement with Mr. P.J. Palmer, a general practitioner, for the lease of his practice at 185 Elizabeth Street. The effect of the lease was that Mr. Palmer, who was described as a ``locum tenens'', was to receive all the fees earned from the practice whilst he was conducting it, subject on his part to certain obligations and payments to the respondent. The lease contained an option to purchase ``should the lessor desire to dispose of the practice during the term''. A separate agreement dealt with the leasing of the plant and fixtures in the practice.

In the result the respondent travelled to London in September 1975, and as his purpose in incurring the expenses the subject of this appeal is not accepted by the Commissioner, it is appropriate at this point to set out what the respondent himself said on the matter. In his affidavit he said:

``I believed that if I studied for the degree of Master of Science in Periodontology at London University I would improve my clinical skills and my overall knowledge of the subject... I say that at both times, namely when I leased my practice to Mr. Palmer and when I left for England, it was my intention to return to Australia and resume my general practice increasing the portion thereof dealing with periodontic work. It was my belief at these times that I would be unable at any event to practise as a specialist in periodontics because of my lack of experience in the field... I say that it was my intention in leasing my practice to Mr. Palmer to be put in a position that I could upon my return to Australia immediately resume my general practice.''

He denied under cross-examination that he had decided to become a periodontist and

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that was why he went to London to get the degree (p. 35).

The transcript of the evidence shows the following:

``Q. Did you then see the prospective move as having any effect upon your income? - A. Yes.

Q. What was the effect you saw it having? - A. That I felt it would increase my income by allowing me to do more complicated work - before this I felt that the treatments I was able to undertake were limited to simple cases and early cases - that this would allow me to undertake more complex cases, that I would be able to do a greater volume of that and take cases through to completion rather than referring them. This would involve a large proportion of surgical treatment which I used to do simple cases at that stage when as in most fields of dentistry the more complex work you do the higher the fee charged - crown and bridge and cap work. Obviously it is paid at a higher rate per hour than say simple work which anyone can do and I felt this would allow me to concentrate on these aspects which I enjoyed doing and getting a higher fee for and my intention was to put in an assistant, a new graduate who would be able to look after the simple work shall I put it.


Q. The opportunity of doing the different periodontist work is limited? - A. The type of work you can do is only limited by your experience and training and as such a general practitioner can do the most advanced work in any specialty provided he has the training and experience to be able to do it.''

(p. 26.)

Later he said:

``Q. (Lee J.) Clear up one thing, Dr. Highfield, when you went to London you said you went there to further your knowledge and to expand your practice? - A. Yes.

Q. What did you at that stage intend your practice should consist of when you came back with this additional knowledge? - A. What I intended was that I would - there is a lot of periodontic treatment practised which I was not - I was doing only a limited amount. I would expand that aspect of it and continue more or less the way I was. I had a very good practice and a very busy practice. In many respects I was very happy with the practice but while I was away -

Q. I want to get it in my mind what you had in your mind when you went. You were going to expand the practice, further your knowledge, which meant more periodontic work? - A. That is correct.

Q. Was it still to remain the same sort of general practice? - A. Yes.''

The substantial basis of the Commissioner's contention that the respondent should not be accepted when he contends that he intended his trip to London to equip him for a greater earning potential in his practice as a general practitioner is that the respondent very soon after his return from London in September 1976 did in fact sell his practice, then took up a full-time appointment with the University of Sydney - this as I have said provides clinical experience in periodontics - and he also began part-time work for a specialist periodontist as further practical experience to fit him for acceptance as a periodontist. He also applied to obtain registration by the Dental Board as a periodontist without such practical experience (Exhibit 1 letter dated 15th October 1976 to Dental Board).

In order to see these subsequent facts in their proper light it is in my view essential to bear in mind that Mr. Palmer who leased the practice made it quite clear in his evidence that when he leased the practice he had no intention at all of buying it, in fact his intention was to return to England at the expiration of the lease. He had spent five years in England. In his evidence he said that the change of mind on his part came about because ``my son was born in March of that year [1976] and it was after that I had second thoughts about leaving Australia and going back overseas and it was after that that I guess I was also starting to feel at home in the practice and thinking it wouldn't have been such a bad thing to stay on if I could''.

The evidence shows that there was correspondence in July 1976 between Dr. Highfield and Mr. Palmer on the matter of a

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sale but that Dr. Highfield refused to commit himself until he returned to Australia. In Mr. Palmer's letter, Exhibit 5, there is reference to the fact that Dr. Highfield's wife had stated that the doctor was negotiating with other purchasers but Dr. Highfield has made it quite clear that that was not the case.

On his return from the United Kingdom the respondent as I have said sought registration as a periodontist but the Dental Board declined to grant it because of lack of practical experience. He was offered a full-time position as senior lecturer in Preventive Dentistry (Periodontics) at Sydney University and he accepted. He made an arrangement with a Mr. Withycombe, a periodontist, to gain practical experience as a locum and that continued until early January. He then worked part-time for another periodontist, Mr. Harvey, until December 1978.

The sale of the practice to Mr. Palmer took place on 1st December 1976. The respondent obtained specialist registration as a periodontist in November 1977 and was able to commence his practice in that specialty in January 1979.

The evidence shows that whilst the respondent was in London his nameplate remained upon the door of his surgery and also on the directory at the entrance to the building and that his wife looked after his interests in regard to the practice to the extent that that was necessary during his absence. The evidence satisfies me that the respondent was merely temporarily absent from his practice, that he always intended to resume general practice on his return and indeed the terms of the agreement itself point to that conclusion. It is not without significance, in my view, that in November 1975 when he was in London and when Mr. Withycombe had approached him with a suggestion that he join him in his practice as a periodontist in a part-time way the respondent wrote back obviously indicating that he was intending to retain his general practice. Mr. Withycombe's letter reads:

``Your suggestion about phasing in seems sensible except that I can't see how under our set up you can be a G.P. for three days and a specialist for two.''

I am satisfied that it was the fact that Mr. Palmer decided, after the birth of his son, to offer to purchase the practice taken with the fact that the respondent was immediately able on his return to obtain both the position at the University and the opportunity of clinical experience with practising periodontists that resulted in the respondent taking the chance there and then to launch himself positively on a path to specialist periodontics. In coming to this conclusion I am mindful of the warning given by Barwick C.J. in
Gauci & Ors. v. F.C. of T. 75 ATC 4257 at p. 4259 of the need to receive ``with the greatest caution'' the evidence of the taxpayer as to his intentions but I am satisfied that making due allowance for the same lapse between the events being testified to and today, the respondent was seeking to give an honest account. Before one allows subsequent events to be the basis for rejecting a taxpayer's assertion that he had a particular intention at a particular time, it is of the utmost importance that the Court should seek to see the matter as he saw it at that particular time. I do not accept the contention of the Commissioner that the respondent's credibility was shaken in cross-examination.

The conclusion which I have drawn from all the foregoing is, as I have already said, that the respondent is to be accepted when he asserts that he intended to continue in general practice, and I am satisfied that his purpose in going to London was to use the knowledge which he obtained, in the advancement of his practice as a general practitioner, but that this intention was accompanied by a further intention or aspiration that if and when he could, he would become a specialist periodontist. I am satisfied that as circumstances appeared to him at that time, there was no reason for him to assume that he would not be in general practice for some appreciable time into the future.

Upon what basis then can the respondent claim that he is entitled to have the travelling expenses deducted from his income pursuant to sec. 51(1)? The Commissioner, I should mention, makes no distinction between meals and accommodation and the other items involved in the total claim and concedes that if the travelling expenses component is deductible then the remaining items are also deductible. The respondent's claim that the expenditure is deductible rests upon the

ATC 4469

evidentiary basis that the acquisition of additional knowledge by the respondent is a matter bearing upon the gaining of assessable income from his general practice. He acknowledges that the gaining of the degree has a real significance in equipping a man to carry on the practice of a periodontist but he claims that that is no reason why a general practitioner should not, in the course of his general practice, seek greater knowledge in regard to one aspect of the work of that practice and then be entitled to deduct, under sec. 51(1) the expense he has incurred in acquiring that knowledge.

The case is one in which during the relevant year the respondent, certainly from September 1975, was not himself carrying on his practice. He had leased it to Mr. Palmer. But, as I have earlier held, the position was that the respondent was merely temporarily absent from his practice whilst overseas and that he always intended to resume practice. Section 6 of the Income Tax Assessment Act defines ``business'' as including a profession. A man can be carrying on his business although he is out of the country and another conducts it and keeps it going. It is a question of fact in every case whether a person is carrying on business at a particular time. I am satisfied that the respondent was carrying on business during the year ended 30th June 1976 within the meaning of sec. 51(1) of the Act and that the case falls to be determined by reference to the second limb of the section. It is, of course, not necessary that the outgoings claimed as a deduction should be shown to have been incurred in gaining assessable income during the year in which it was incurred. It is sufficient if the outgoing relates in the relevant way to the gaining of income in a further year (
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68;
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at p. 498).

The authorities are clear that the criteria of deductibility are the same under each limb of sec. 51(1). As Brennan J. put it in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4545:

``The requirement in the second limb that expenditure be incurred in carrying on a business parallels the requirement in the first limb that the expenditure be incurred in gaining or producing the assessable income... Whether the assessable income against which expenditure is sought to be deducted is produced in the carrying on of a business or in some undertaking which does not constitute the carrying on of a business the same kind of factors are material to deductibilty.''

The relationship of the outgoings to the gaining of assessable income was defined by Dixon J., as he then was, in
W. Nevill & Co. Ltd. v. F.C. of T. (1936-1937) 56 C.L.R. 290 at p. 305 as follows:

``This means that it must have been incurred in the course of gaining or producing the assessable income.''

Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 the Full High Court (Latham C.J., Rich, Dixon, McTiernan and Webb JJ.) said (at pp. 56-57):

``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income... In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

``So also it may be said that it is enough to satisfy the second part of the subsection that the occasion of the loss or outgoing is to be found in the carrying on of a business for the production of assessable income.''

A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4072; (1975) 132 C.L.R. 175 at p. 198, per Mason J.

Charles Moore & Co. (W.A.) Pty. Limited v. F.C. of T. (1956) 95 C.L.R. 344, Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. in dealing with deductibility of outgoings under sec. 51(1) said at p. 351:

``What matters is their connection with the operations which more directly gain or produce the assessable income.''

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The question of deductibility of expenses incurred in obtaining a higher degree of qualification within a profession which a taxpayer is carrying on, does not appear to have received consideration in the Courts although the Commissioner and the Board of Review have had long experience in dealing with such claims. However, the decision of Menzies J. in F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494 dealt with the deductibility of expenditure incurred by an employee in obtaining higher knowledge and it is appropriate to consider that decision and its application to the present case.

The facts were that the taxpayer was at all relevant times a teacher employed in the Education Department and he had paid $89 expenses in connection with the submission of a thesis for the purpose of gaining a Teacher's Higher Certificate. The gaining of a Teacher's Higher Certificate had the consequence that the holder was entitled to promotion and also entitled to a higher salary without change of status. The taxpayer had also enrolled in the Faculty of Arts and paid university fees and he claimed a deduction of these fees.

Menzies J. allowed the deduction of the expenses for the thesis but not the deduction of the university expenses. As to the former claim he said that there was ``... a plain connection between the obtaining of the certificate and the assessable income of the taxpayer'' in years subsequent to the obtaining of the certificate (ATC pp. 4185-4186; C.L.R. p. 496).

He went on at ATC p. 4186; C.L.R. p. 498:

``The evidence to which I have referred establishes that the possession of a Teacher's Higher Certificate would not only enable the taxpayer to earn more in the department in the future, it forthwith entitled him to be paid more for doing the same work without any change in grade. If the certificate had been obtained during a tax year, instead of at the end of a tax year as was the case, it would have entitled the taxpayer to greater earnings in that year. The taxpayer, in reliance upon the conditions of his employment, spent money to earn more. In these circumstances the outgoings necessary to obtain the certificate ought, I think, be regarded as outgoings incurred in gaining assessable income.''

As to the university fees he said at ATC p. 4187; C.L.R. p. 499:

``As I have said, I am not able to find any connection 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 connection between the outgoing and assessable income.''

(Emphasis added.)

His Honour referred to F.C. of T. v. Finn (1961) 106 C.L.R. 60 as supporting his conclusion.

It will be seen that his Honour decided the matter of deductibility by considering the extent to which it was established, as a fact, that the incurring of the expenditure was related to the actual gaining of income. In every case where deductibility comes into consideration under sec. 51(1), this, of course, is the fundamental question. The fact that the relationship between the expenditure and the gaining of income can vary in degree and extent from case to case has given rise to a multitude of decisions upon the section but:

``In every case it is clearly a question of fact and degree whether the outgoing has the necessary relation to the gaining of assessable income.''

F.C. of T. v. Forsyth 81 ATC 4157 per Wilson J. at p. 4163.)

``As my brother Stephen has rightly observed the only criterion of deductibility is the wording of the section itself.''

Handley v. F.C. of T. 81 ATC 4165 per Aickin J. at p. 4174.)

The approach made by Menzies J. in F.C. of T. v. Hatchett (supra) to the question of deductibility was applied by Helsham J. (as he then was) in
F.C. of T. v. White 75 ATC 4018 to a case where a clerk in an accountant's office claimed deduction for expenses of attending an accountancy certificate course at a technical college. His

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Honour after referring to Hatchett's and Finn's cases said at p. 4022:

``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.''

F.C. of T. v. Lacelles-Smith 78 ATC 4162 Waddell J. considered the deductibility of travelling expenses incurred by a clerk in the Taxation Office in attending a course designed to fit him for entry into an assessing school run within the department. His Honour in allowing the deduction used these words at p. 4163:

``In the present case the taxpayer's successful commencement of the Commerce Diploma Course led to his being selected for an Assessing School and to his promotion to the position of Assessor, Grade 1 with an increase in salary. This was a reasonably certain consequence of his commencement of the course and the expenditure thereby incurred was clearly, in my opinion, incurred in gaining the assessable income. Thereafter, his continuance of the course must be regarded as likely in all probability to have led to promotion as an assessor with consequent increases in salary provided he was successful in the course and performed his departmental duties satisfactorily. In fact, he was promoted to Acting Assessor Grade 3 with an increase in salary in the year of income in question and during the 1975 tax year was promoted, again with an increase in salary. For present purposes it is irrelevant that he has now discontinued the course. When he commenced it it was reasonable to suppose that his pursuit of the course would lead to the promotions and increases in salary which he has gained. It was part of the circumstances of his employment that it was necessary for him to spend the money on pursuing the course which he did in order to earn greater income in the future.

In these circumstances there seems to me to be a clear connection between the expenditure claimed as a deduction and the earning of the assessable income.''

I approach the question of deductibility in the present case in the same way as was done in F.C. of T. v. Hatchett (supra) and ask myself whether on the facts established the travelling expenses were incurred in gaining assessable income in the sense laid down in the authorities.

The claim made by the respondent that the knowledge obtained by him in obtaining the degree of Master of Science in Periodontics was so related to the carrying on of a general practice that the expenses involved were incurred in gaining assessable income, in my view, is made out. I have earlier set out the evidence given by the respondent as to the effect which the course leading up to the degree could have upon the performance by him of his skills in periodontics in his general practice. The significance of the additional knowledge to the gaining of additional income is to be looked at against the background that he had an established general practice and that he had a special interest in periodontics. It is not merely a matter of the respondent believing that he would earn more by reason of the extra knowledge and skill acquired in obtaining the degree, nor merely a matter of him intending to use the new acquired knowledge in his general practice - the evidence goes beyond that. The objective facts in regard to his practice, the fact that it had a significant periodontic component and that the respondent had a special interest in that component and a desire to attract more complicated work to it establishes the high probability that additional skill in periodontics would enable higher fees to be charged for that work and that there would be less need to refer some of the not so simple periodontic work to specialists. In F.C. of T. v. Hatchett (supra) the possession of the teacher's college certificate immediately entitled the taxpayer to higher remuneration. The additional knowledge and skills acquired in obtaining the degree would give to the respondent additional ability as a general practitioner which would justify him, in a commercial sense, in charging higher fees for the periodontic work and at the same time he would reasonably be entitled to expect that

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those charges would be acceptable to his patients because of his additional skill. Once it is accepted that the respondent at all relevant times intended to continue his general practice, the objective factors earlier referred to in regard to his practice and the periodontic component of it and the higher fees chargeable because of the respondent's skill in periodontics, in my view, established of themselves the necessary connection between the whole of the expenditure and the gaining of assessable income. It is not for the Court to decide what is and what is not appropriate for the respondent to do by way of carrying on his practice.

``The taxpayer is at liberty to determine for himself what the scope and nature of his business or undertaking shall be and how it shall be conducted, the Act having no effect upon those matters but taking `the result of the taxpayer's activities as it finds them'.''

(Brennan J. in Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549 quoting Williams J. in
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 at p. 190.)

The expenditure in obtaining the additional knowledge was an appropriate expenditure for the respondent to make for the purpose of expanding the periodontic component of his practice and readily satisfies the test propounded by Deane and Fisher JJ. in Magna Alloys & Research Pty. Ltd. v. F.C. of T. (supra):

``The controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income.''

(p. 4559.)

In my view, the case is one in which it can be said, as Menzies J. said in F.C. of T. v. Hatchett (supra), that there is a ``perceived connection'' between the outgoings and the gaining of income in his practice and, this being so, deductibility is not denied merely because the respondent saw and appreciated that the obtaining of the degree was also a step to be taken to set him on the road which he both hoped and intended (as I have found) would lead him to specialised practice in periodontics. An outgoing which is wholly ``incidental and relevant'' to the gaining of assessable income (Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 57) does not cease to be deductible merely because the taxpayer in making the expenditure was also motivated to achieve another purpose which may or may not be connected with gaining assessable income. Magna Alloys & Research Pty. Ltd. v. F.C. of T. (supra):

``The character of the expenditure is not lost because the expenditure was apt to serve both the business purpose and the purpose of defending the directors...''

(per Brennan J. at p. 4553.)

There remains, however, for consideration the question whether notwithstanding that the expenditure was incurred in gaining assessable income, it was nonetheless an outgoing ``of capital or of a capital, private or domestic nature'' and is thus denied the benefit of deductibility conferred by the earlier part of the section. So far as outgoings of capital or of a capital nature are concerned Dixon C.J. interpreted the section in
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1958-1959) 101 C.L.R. 30 at p. 34, as follows:

``In other words it is supposed by the subsection that a loss or outgoing incurred in gaining or producing the assessable income or in carrying on a business for that purpose may nevertheless be a loss or outgoing of capital.''

He went on to explain (at p. 35) that outgoings of capital were treated by subsec. (1) of sec. 51 ``not as a category outside of and contra-distinguished from the prima facie criterion of deductibility expressed in the earlier part of that provision but as a category of loss or outgoing capable of falling within the wider category established by that criterion...''. In F.C. of T. v. Hatchett (supra), Menzies J. held that expenditure on the acquisition of knowledge could not be regarded as being 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.'' (At ATC p. 4186; C.L.R. p. 497.) Human capacity, said his Honour, is ``entirely different from `capital''' (ATC p. 4186; C.L.R. p. 498). I apply that reasoning in the present case.

ATC 4473

His Honour then went on to consider whether the outgoing could be regarded as an outgoing of a private nature. He held that the conclusion that the expenditure under consideration there was incurred in gaining assessable income.

``... carries with it the conclusion that the expenditure was not of a private nature. It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive.''

In Handley v. F.C. of T., 81 ATC 4165, Aickin J. expressed a similar view in regard to outgoings of a domestic or private nature. He said at p. 4175:

``Thus the exclusion of expenditure made on, or in so far as it is on, private or domestic matters comes from the requirement of the opening words of sec. 51(1) which limit deductions to expenditure incurred in gaining assessable income. The express exclusion in the closing words of the subsection of expenditure of a private or domestic nature has the same character as the exclusion of expenditure in gaining exempt income; it must be regarded as having been inserted by way of precaution of emphasis - cp. the discussion by Menzies J. in F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at p. 498. The fact that the opening words impliedly exclude that which is not incurred in gaining or producing assessable income may make the final express excluding words no more than partly explanatory and partly definitive of what is excluded. In my opinion this section does not require a two-stage apportionment.''

In F.C. of T. v. Forsyth 81 ATC 4157, Wilson J. took a different view at least in regard to outgoings ``of a domestic nature''. He said at p. 4164:

``I see no reason why it should not be a proper application of sec. 51 of the Act in the present case to say that if the proper conclusion on the facts was that the rent was prima facie an outgoing incurred in gaining or producing assessable income then the exception with respect to outgoings of a domestic nature would operate to exclude it from deductibility.''

Murphy J. in Handley v. F.C. of T. (supra) at p. 4172 expressed a similar view.

In the present case, however, there is no room for a consideration that the expenditure could be classified as ``of a domestic nature'' and, on the reasoning of Menzies J. in F.C. of T. v. Hatchett (supra), it is not of a capital nor of a private nature. It is therefore deductible under sec. 51(1) as the majority of the Board of Review held, and the appeal by the Commissioner fails.

The conclusion to which I have come makes it unnecessary to consider whether the expenditure under consideration would have qualified for deduction under sec. 51 if the Commissioner's contention as to the facts had been upheld by me but I will make brief reference to that aspect. The contention was that the respondent in incurring the expense, did so as a first step in becoming a specialist in periodontics and that it was not his intention to return to his general practice once he had obtained the degree. He had, said counsel for the Commissioner, given up any intention of carrying on his general practice when he left for London and had set about obtaining the qualifications necessary to enable him to specialise in periodontics.

The cases do not, in my view, point clearly to what the solution to that problem would be. The respondent, in the hypothetical situation being considered, would be a person already qualified as a dentist who was seeking to advance himself in that profession by specialising in a particular aspect of dentistry. Dixon C.J. in F.C. of T. v. Finn (1961) 106 C.L.R. 60 used expressions which might suggest that he held the view that such expenses would be deductible. At p. 64 he said:

``For it is indeed important that officers and employees engaged at a salary in the exercise of a skilled profession should not be in a worse position in respect of the costs of better equipping or qualifying themselves in point of knowledge and skill than are those exercising the same profession as a calling remunerated in fees paid by clients or by the members of the public who, under whatever style, enlist their services.''

ATC 4474

And Windeyer J. in the same case at p. 70 said:

``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.''

In that case, however (as in F.C. of T. v. Hatchett (supra)), there was a clear inference open that the additional studies undertaken by the taxpayer would improve his claims of promotion and thereby bring greater remuneration to him. Whether that would be the case when a taxpayer gives up general practice to take a higher degree and enter specialised practice would depend on the evidence in any given case. In
F.C. of T. v. Maddalena 71 ATC 4161, Menzies J. at p. 4163 pointed to the fact that sec. 51 operated differently where an employee incurred expense to fit himself for another job compared to the case where an independent contractor incurred such expense to obtain contracts. The former expense was not deductible, the latter was. A professional man equipping himself for a specialty could be said to be in the latter category. On the other hand, a professional man fitting himself by higher degree to go from general practice to specialised practice might well be said to be providing himself with qualifications to carry on a different activity or business and to be in no different position so far as sec. 51(1) was concerned from the person who undertakes a course of study to gain entrance to a profession or to obtain a job. However, the question does not arise for final decision in the present case.

The formal orders in the case will be: Appeal dismissed. Decision of the Board of Review confirmed. The Commissioner is to pay the respondent's costs.

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