Martin v. Federal Commission of Taxation.

David Hunt J

Supreme Court of New South Wales

Judgment date: Judgment handed down 16 November 1983.

David Hunt J.

This is an appeal by Mrs. Lorraine Cheryl Martin from the decision of the Taxation Board of Review No. 3, reported as Case P13, 82 ATC 60, upholding the Commissioner's rejection of the taxpayer's claim for a deduction for child-minding expenses incurred during the financial year ended 30 June 1979 whilst she worked as a steno-secretary.

Such an appeal lies to this Court only where the decision of the Board of Review involves a question of law: Income Tax Assessment Act 1936, sec. 196(1). Counsel appearing for the Commissioner informed me that he had been expressly instructed not to take any point either that there was no jurisdiction in the Supreme Court to entertain this appeal or as to the width or sufficiency of the taxpayer's grounds of objection. Upon this basis, therefore, I do not propose to attempt to identify the question of law which was so involved in that decision; indeed, I doubt whether there was one: see
Foreman v. F.C. of T. 83 ATC 4073 at pp. 4074-4075; (1983) 45 A.L.R. 258 at p. 261.

I shall refer to the evidence later. First, it is necessary to isolate the issue which I have to decide. The claim for deduction for the child-minding expenses was made by the taxpayer pursuant to sec. 51(1), which is in the following terms:

``51(1) All... outgoings to the extent to which they are incurred in gaining or producing the assessable income... shall be allowable deductions except to the extent to which they are... outgoings... of a... private or domestic nature...''

A logical starting point for a consideration of the taxpayer's claim is the decision of Mason J. in
Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171, which is I am informed the most recent decision from the High Court concerning the deductibility of child-minding expenses. The taxpayer in that case worked at home after sending her child to a nursery, but the decision did not turn upon that fact. Mason J. held (at ATC pp. 4175-4176; C.L.R. pp. 175-176) that the expenditure on such child minding was incurred for the purpose of earning assessable income and that it was an essential prerequisite to the derivation of that income, but he denied a deduction upon the basis that it was not incurred in or in the course of gaining that income, as required by sec. 51(1) as interpreted in
Ronpibon Tin N.L. v. F.C. of T. (1949) 8 A.T.D. 431 at pp. 435-436; (1949) 78 C.L.R. 47 at pp. 56-57;
Lunney v. F.C. of T. (1958) 11 A.T.D. 404 at pp. 411-412; (1958) 100 C.L.R. 478 at p. 497. To qualify as a deduction, those cases say, the expenditure must be incidental and relevant to the gaining of assessable income and the occasion of the expenditure must be found in whatever is productive of that income. Whether or not the expenditure should be characterised as having been incurred in or in the course of gaining assessable income depends upon the essential character of the expenditure itself, not upon the fact that it is an essential prerequisite to the derivation of assessable income: Lunney's case at A.T.D. p. 413, C.L.R. p. 499. The child-minding expenses were found to be neither relevant nor incidental to the work which the taxpayer did to produce that income. His Honour also held (at ATC p. 4176; C.L.R. p. 176) that, as the expenditure in question did not fall within the general provisions of the subsection, it was of a private or domestic nature and that for this reason it was excluded by sec. 51(1). His Honour did, however, expressly reserve his opinion as to whether an expenditure which had been incurred in or in the course of gaining or producing assessable income may nevertheless be of a private or domestic nature.

The taxpayer in the present case submits, firstly, that Lodge's case was wrongly decided. That was a formal submission only, and no more need be said in relation to it. (Before the Board, the taxpayer accepted that Lodge had been correctly decided.) She submits, secondly, that that case can be distinguished in relation to the facts of the present case. The distinction, it is said, is that in the present case the taxpayer incurred the expenditure on child-minding not simply to enable her to go out to work and thus to earn

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income (as did the taxpayer in Lodge) but also because her employers required her to do so in order to ensure that she would not be distracted from her work by worry in relation to the well-being of her child. This is not a matter which was considered in Lodge's case.

The origin of the distinction for which the taxpayer contends is to be found in the judgment of Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4187; (1971) 125 C.L.R. 494 at p. 499, when his Honour, in denying a claim for a deduction in relation to university fees paid by the teacher (upon the basis of
F.C. of T. v. Finn (1961) 12 A.T.D. 348; (1961) 106 C.L.R. 60), identified the need for there to be a ``perceived connection'' between the outgoing and the taxpayer's assessable income, in the sense (as I understand it) of the outgoing being seen to have a direct effect upon the gaining of his assessable income. As Helsham J. (as he then was) said in
F.C. of T. v. White 75 ATC 4018 at pp. 4022-4023; (1975) 1 N.S.W.L.R. 1 at p. 7, the result of the decisions in the cases of Finn and Hatchett is that expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under sec. 51(1) when it can be said that those studies are either part and parcel of the employment, in that the expenditure is incurred in the process of carrying out the taxpayer's duties as an employee, or they can be seen to have a direct effect on gaining his assessable income.

The ``perceived connection'' distinction is said to have flowered in a series of cases decided by Waddell J., commencing with
F.C. of T. v. Kropp 76 ATC 4406. The taxpayer, a chartered accountant, successfully claimed his expenses in travelling overseas to obtain experience with an affiliated firm of accountants. His employer encouraged such overseas experience because of the benefits to its own business which were seen to result from that experience upon the taxpayer's return. The ``perceived connection'' was the expectation (which was in fact fulfilled) that the experience would lead to a promotion and to an increase in the taxpayer's salary earlier than he would have otherwise have expected (at p. 4411).

F.C. of T. v. Ballesty 77 ATC 4181, the taxpayer, a professional footballer, successfully claimed his expenses in travelling in his own motor vehicle between his home and football matches played on his team's home ground (those between his home and ``away'' games had already been allowed by the Commissioner). He was under a contractual obligation to perform at his best in matches, and as a practical matter the emotional stress before a game dictated that he travel alone in his own vehicle and not have to come into contact with other people. The occasion for the expenditure was found to be in activities which were productive of the taxpayer's assessable income. The principal activity, it would appear, was the necessity for the taxpayer to attain and to maintain a proper frame of mind for his best performance on behalf of his team.

F.C. of T. v. Smith 78 ATC 4157, the taxpayer, a public servant, successfully claimed self-education expenses as a deduction under sec. 51(1), the course which he undertook being held to be a ``practical necessity'' as a qualification for promotion and thus an increase in the taxpayer's salary (at p. 4162). See also
F.C. of T. v. Lacelles-Smith 78 ATC 4162 at p. 4163.

The taxpayer also relied upon the decision of G.N. Williams J. in
F.C. of T. v. Wilkinson 83 ATC 4295, in which the taxpayer, an air traffic controller, successfully claimed the cost of taking flying lessons. The ``perceived connection'' was found (at p. 4303) to be the inherent likelihood that as a result of such a further qualification the taxpayer would be promoted and would receive a higher salary.

Another decision relied upon by the taxpayer was that of the Taxation Board of Review No. 1, reported as Case E34
(1954) 5 T.B.R.D. 205, in which the taxpayer, a ``celebrated opera singer'', successfully claimed her expenses in taxi and hire car fares in travelling between the theatre and her hotel when appearing interstate, the need for such travel being the exhausted physical condition in which she found herself after her performances and after removing her heavy make-up. Such an expenditure was found to be inextricably linked with the taxpayer's employment and both incidental and relevant to the production of her salary.

When this ``perceived connection'' is taken into account in the present case, the taxpayer submits, the result must be different to that in Lodge's case. I am not satisfied that this is so. The ``perceived connection''

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has not, in my view, replaced the requirement that the expenditure must have been incurred in or in the course of gaining the taxpayer's assessable income. What Menzies J. said in Hatchett's case was that there must be a ``perceived connection'' between the outgoing and the assessable income; his Honour did not say that such a connection was sufficient by itself. The terms of the statute remain clear, and the expenditure must be ``incurred in gaining or producing the assessable income''. Those terms remain the criteria of deductibility notwithstanding the various tests which have been posed in the various cases:
Handley v. F.C. of T. 81 ATC 4165 at pp. 4168-4169 and 4174-4175; (1981) 34 A.L.R. 274 at pp. 278 and 286. Expenses incurred by a taxpayer in ensuring that she would not be distracted from her work by worry in relation to the well-being of her child does not, in my view, amount to an expenditure incurred in or in the course of gaining the taxpayer's assessable income.

Expenditure incurred in relation to further studies or overseas experience seems to me to stand upon a different basis to child-minding expenses. In each of the cases of Kropp, Smith, Lacelles-Smith and Wilkinson, the expenditure was found to be likely to result in earning an increase in salary through promotion. As G.N. Williams J. put it in the last of those cases (at p. 4303):

``The nexus is established if there is a reasonable assurance that promotion will follow. The real reason why the taxpayer failed in Case N24,
81 ATC 131 was that she had reached the top of the promotion ladder, and her overseas experience, though making her a better history teacher, could not lead to an increase in income. There was no `connection' perceived or otherwise, between the outgoing and income likely to be earned.''

There is no suggestion in the present case that the taxpayer was likely to obtain any additional salary as a result of the expenditure which she incurred on child-minding.

In each of the remaining cases of Ballesty and Case E34 (the celebrated opera singer), the expenditure was incurred in relation to travelling expenses. That expenditure, too, seems to me to stand upon a different basis to child-minding expenses. The occasion for such expenditure upon travel, where the travel itself is perceived to have a direct effect upon the gaining of assessable income, is more easily seen to be that which is productive of that income, and to be an expenditure incurred in or in the course of gaining that income. This was the stumbling block upon which the claim foundered in Lodge's case: see Mason J. at ATC pp. 4175-4176; C.L.R. p. 175. That stumbling block remains for the present taxpayer, despite the decision in Ballesty's case which (if correctly decided) is certainly the closest to the present case from a factual point of view.

The distinction proposed by the taxpayer in the present case, ingenious as it admittedly is, thus does not avoid the inevitable result of the application of the decision in Lodge's case. Certainly I am not prepared to say, in my position within the judicial hierarchy, that Lodge's case would have been decided differently if this argument had been put. Misgivings in relation to the whole of this line of authority were, of course, expressed by Dixon C.J. in Lunney's case (supra) at A.T.D. pp. 405-406; C.L.R. p. 486, as they have also by other members of the High Court (for example, by Stephen J. in Handley's case (supra) at ATC pp. 4170-4171; A.L.R. p. 281), but that Court has shown no inclination to reconsider those authorities. It is not for this Court to do so. It is really a matter for Parliament, not for the Courts. If, in this day and age, it is thought to be proper (as many people think that it is) that child-minding expenses (and even travelling expenses) are proper deductions for assessable income, let the Parliament so provide for them. Ingenious but unreal and unsubstantiated distinctions sought to be made by the Courts in relation to sec. 51(1) cannot relieve Parliament of that responsibility.

The other question which was argued was that which was left open by Mason J., in Lodge's case, namely whether the expenditure in relation to child-minding must in any event be excluded as a deduction because it is in any event of a private or domestic nature. That an expense which would otherwise qualify for deduction within the terms of sec. 51(1) would not for that reason alone be excluded as such a deduction appears now to be accepted: Handley's case

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(supra) at ATC pp. 4170, 4171-4172 and 4175; A.L.R. pp. 280, 282 and 287. But, in the light of my finding that the expenditure in question in this appeal does not otherwise qualify for deduction within the terms of sec. 51(1), it seems to me to be inappropriate to attempt to unravel what is still a very difficult question as to whether that expenditure would in any event have been excluded in the present case.

However, as this is an appeal in which attempts will no doubt be made to take the question further (the Commissioner having already co-operated to a large extent so far), it is appropriate to refer to the facts notwithstanding the view which I have formed rejecting the distinction from Lodge's case upon which the taxpayer relies.

The taxpayer did not give evidence before me. The parties were content to rely upon that given before the Board of Review. This is unfortunate, because that evidence was vague and imprecise. I must, however, assume that the taxpayer would not have been able to improve upon it before me. According to that evidence, the taxpayer was, at the relevant time, separated from her husband. Her son was then aged 3-4 years. (It was common ground between the parties, and I accept, that a child of four years of age could not safely be left alone at home and that, if such a child were in fact left alone at home, the concentration of the mother in the task for which she was employed would suffer seriously.) The taxpayer had recommenced employment as a steno-secretary in 1977 when her son was two years of age. When interviewed for that employment, she was asked whether she had a child, what arrangements she intended to make for his care during working hours and what her intentions were if he became sick. She told the Board of Review at p. 61 that her understanding was that:

``... if my child care arrangements were not looked after by myself, I would probably be unsuccessful in my application... It put the onus of child care squarely with me to do something about it.''

According to the taxpayer's return for the relevant tax year (that which ended 30 June 1979) she was still employed in this position during some five weeks of that financial year. She also held two other positions during the course of that financial year, one for just under three weeks and one for five and a half months. She told the Board of Review that, when being interviewed for these other positions, she had been asked similar questions concerning the arrangements which she had made for the care of the child during working hours and if he became sick. A representative of her third employer gave evidence that, when the taxpayer was interviewed for that position, the personnel officer had asked questions of her in order, he said:

``... to satisfy himself that there would be nothing of a personal nature which would prevent (her) from performing the function (sic).''

He told the Board that:

``Basically, I have to satisfy myself that there would be no problems arising in relation to the applicant being able to fulfil her duties... We would accept married women with children provided that that would not interfere with their ability to produce results within the organization.''

It is submitted that this evidence supports the distinction which it was sought to make in relation to Lodge's case. I do not so read it as supporting that distinction, if the distinction itself exists. It is far from clear to me that the understanding of the taxpayer or that of her third employer during that financial year was directed to anything more than a wish on the part of the employer to ensure that the attendance of the taxpayer at work could be depended upon notwithstanding her obligations to her child. The final sentence of the evidence which I had quoted from the representative of her third employer (``We would accept married women with children provided that that would not interfere with their ability to produce results within the organization'') is the highest which that evidence goes to suggest that the employer was in any way concerned that the taxpayer would not be distracted from her work by worry in relation to the well-being of her child. But I am not persuaded that the evidence goes far enough to establish that that was either the purpose of the questions or the basis (or understanding) upon which the taxpayer was

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employed. I am prepared to proceed upon the basis that an understanding between employer and employee is sufficient, and that it need not be a term or condition of her employment; so much was conceded by the Commissioner. But even on this somewhat imprecise basis I am unable to see within the evidence any factual basis upon which such an understanding could be established by the taxpayer in this case. In saying that I am not persuaded by the evidence, I take into account the onus upon the taxpayer imposed by sec. 190 and the burden of proof, as discussed by me in
Allied Pastoral Holdings Pty. Ltd. v. F.C. of T. 83 ATC 4015 at pp. 4018-4027; (1983) 1 N.S.W.L.R. 1 at pp. 7-15. I should emphasise that it is not a matter of disbelieving the taxpayer. I am prepared to accept both her evidence and the evidence of the representative from her third employer to the full, and to draw any reasonable inferences from that evidence. But, even making all allowances for the difficulties in reproducing conversations of so long ago, the evidence in my view falls very far short of establishing an understanding that the taxpayer had been required to pay for child-minding in order to ensure that she would not be distracted from her work by worry in relation to the well-being of her child rather than simply to ensure that the attendance of the taxpayer at work could be depended upon notwithstanding her obligations to her child.

I dismiss the taxpayer's appeal. I order her to pay the Commissioner's costs. I direct the entry of judgment accordingly.

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