KP Brady Ch
JE Stewart M
DJ Trowse M
No. 2 Board of Review
K.P. Brady (Chairman); J.E. Stewart and D.J. Trowse (Members)
In this reference, we are required to decide whether the taxpayer, a history teacher, is entitled, in terms of sec. 51(1) of the Income Tax Assessment Act, to a deduction for the costs associated with a visit to China.
2. The tour, undertaken in May 1979, was organised by the Australia-China Society. The members of the party were, in the main, educators involved in the teaching of history, and it appears that the seeking of information on the subject of Education in China was the focal point of activities engaged in whilst overseas. The itinerary had been so arranged to maximise exposure to that interest, and the taxpayer had been able to observe operations at educational centres located in the cities visited and to participate in discussions with members of staff and administrators of those institutions. The touring party arrived in Canton on 13 May 1979, after an overnight stay in Hong Kong. The period of the tour was three weeks and, according to the taxpayer's evidence, that time was occupied in the pursuit of knowledge, particularly that branch which appertained to the methods of education currently being applied in China. The timing of the journey was arranged to coincide with the May school holidays, and the taxpayer was granted a week's leave without pay so that he could make the trip.
3. The costs related to that travel were claimed as a deduction by the taxpayer in the preparation of his 1979 return, and the following summary demonstrates the composition of the outgoings:
$ Fares and accommodation 1,796 Tape recorder and tapes purchased to record interviews, briefing sessions and notes during travel period 56 Books, historical materials, being maps, project materials, magazines and records purchased in China 68 ------ $1,920 ------
The Commissioner denied a deduction for the full amount of $1,920, and subsequently disallowed the resultant objection. The taxpayer, dissatisfied with that decision, requested that the matter be referred to a Board for review. At the hearing, the taxpayer represented himself and gave evidence under oath. The Commissioner was represented by one of his officers.
4. At the time of undertaking the trip, the taxpayer was teaching history, a segment of which included Chinese history, to middle school students at a college, and was also responsible for the re-writing of a curriculum for that subject. It appears that only European history was available to students in senior school, and that there existed an expectation that the master in charge of that course would retire at the conclusion of the 1979 scholastic year. Further, it seems that the taxpayer was desirous of progressing to the status of a teacher of Asian history at senior school level, as such advancement would carry an increase in both responsibility and remuneration. On the question of advancement, the taxpayer declared that there existed a verbal agreement between the principal of the college and himself whereby the taxpayer would be appointed to a senior posting at the commencement of the 1980 school year, i.e. upon the retirement of the then senior master. That arrangement, so it was contended by the taxpayer, was subject to the proviso that the taxpayer visit China in order to experience, at first hand, the culture of that country.
5. Also, the taxpayer was engaged in further university studies directed to gaining a Bachelor of Education degree, having previously qualified as a Bachelor of Arts and been awarded the Diploma of Education. One of the units selected by the taxpayer and forming part of that study programme was ``Education in China'', and it was the taxpayer's submission that the information acquired whilst on the tour enabled the successful completion of a major essay on the topic, ``Priority Schools in China Today''. It appears that the material forming the basis of that work was not available outside of China.
6. The taxpayer stated the following reasons relative to his decision to travel to China:
- (i) to comply with the condition of the agreement with the principal of the college, and so be placed to take up the position of history teacher in the senior school at the beginning of the next school year;
- (ii) in recognition that further promotion at the college, beyond the promised posting, could be limited for reasons which we need not recite, the taxpayer considered that the experience and knowledge derived would be beneficial to the furthering of his career as a teacher of Asian history and that those advantages would enhance the prospect of alternative employment at a higher level in the independent school system;
- (iii) to acquire educational aids pertaining to the subject of Chinese history. Such material was, according to the taxpayer, procurable only in China;
- (iv) to collate the information necessary for the successful completion of the unit, ``Education in China'', which formed part of the Bachelor of Education syllabus.
7. Upon the taxpayer's return from overseas, he resumed his former duties at the college in the expectation of progressing to senior teacher status in the following year. When it became apparent that the anticipated vacancy would not eventuate because of the senior master's decision not to retire, the taxpayer resolved to seek advancement elsewhere. He successfully applied for the position of history teacher at another private school, and it appears that the duties involved the re-writing of the year 10 curriculum, specifically with the intention of introducing the subject of Chinese history into the senior school syllabus. In the opinion of the taxpayer, the appointment to that post resulted from his knowledge and interest in Chinese history, the possession of the educational aids purchased whilst in China, and the near completion of the Bachelor of Education degree. The taxpayer commenced his new employment at the beginning of the second term in 1980 with a substantial increase in salary.
8. Section 51(1) of the Act provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
It was the taxpayer's submission that the expenditure totalling $1,920 was incurred in the derivation of his salaried income, whereas the Commissioner took a contrary view, and also stated in his reasons that the outgoing was of a private nature. Furthermore, the Commissioner contended that the purchase of the tape recorder at a cost of approximately $40 was of a capital nature and that no deduction was permitted because of the exclusion clause contained in the section.
9. The words of sec. 51(1) which are most material to the taxpayer's claim are ``incurred in gaining or producing the assessable income''. In
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 8 A.T.D. 431; (1949) 78 C.L.R. 47, the High Court made the following comment on that phrase at A.T.D. p. 435; C.L.R. p. 56:
``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...''
10. The leading authority on the deductibility of outgoings designed to increase one's knowledge, efficiency or aptitude is the decision of the Full High Court in
F.C. of T. v. Finn (1961) 12 A.T.D. 348; (1961) 106 C.L.R. 60. In that case, the taxpayer, a senior architect employed by the Public Works Department of Western Australia, used his long service and accumulated recreational leave to tour Great Britain and the Continent for the express purpose of updating his knowledge on current architectural trends and bettering his prospects of future promotion. At the request of his employer, the taxpayer included in his itinerary a visit to South America with the employer paying the additional costs resulting from that extension. The fact situation was such that Dixon C.J. arrived at (see A.T.D. p. 351; C.L.R. p. 67) the following conclusions in determining whether the cost of the overseas travel was incurred in the gaining or producing of the assessable income:
``In the first place it seems indisputable that the increased knowledge the taxpayer sought and obtained of his subject and the closer and more realistic acquaintance he secured of modern developments in design and construction made his advancement in the service more certain, and that in respect of promotion to a higher grade these things might prove decisive. This was put clearly by the Principal Architect, though in a letter written ex post facto, `I understand from you that the Commissioner now desires to know whether the experience obtained and the large amount of data collected will result in an increase in your income. To me, it is obvious that this must increase your professional efficiency, and hence your value to this Department, and must materially assist your future advancement to a higher position in the Department with consequent increase in income.' In the second place, so far as motive or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. In the third place it is apparent that the heads of his Department, and indeed the Government itself, treated the use which he made of his long service and other leave to study architecture, increase his professional knowledge and study modern trends, as a matter not only of distinct advantage to his work for the State but of real importance in at least one project in hand. In the fourth place it was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service. He was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government.''
The learned Judge decided that the journey abroad was incidental to the taxpayer's employment and that when the foregoing elements were considered in conjunction, they seemed to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income.
11. Having regard to the unchallenged evidence adduced in the current reference and the conclusions reached by Dixon C.J. on the evidence in Finn, we express the following views:
- (i) The increased knowledge sought and obtained by the taxpayer made his advancement more certain.
- (ii) Advancement in grade and salary formed a real and substantial element in the motive which led to the taxpayer visiting China.
- (iii) The principal of the college employing the taxpayer at the time of his departure overseas regarded the use of the period abroad to increase professional knowledge as a matter of advantage to the taxpayer's work for the college.
- (iv) The travel was undertaken while the taxpayer was in the employ of the college and receiving a salary from that source. He was, at that stage, complying with the condition of the agreement reached with the principal on the promised appointment to senior status.
It is against that background that we conclude that the cost of fares and accommodation, amounting to $1,796, represented expenditure incidental and relevant to the gaining of assessable income and that it was incurred in the course of achieving that end.
12. We consider that our decision is supported by the judgments of Menzies J. in
F.C. of T. v. Hatchett, 71 ATC 4184, and Helsham J. in
F.C. of T. v. White, 75 ATC 4018. In Hatchett, Menzies J. closely examined the connection existing between the assessable income of a teacher and expenditure incurred in gaining a higher qualification, the holding of which provided an automatic increase in salary. It was held that there was a clear connection between the obtaining of the Higher Certificate and the taxpayer's future assessable income, and accordingly the related expenditure was an allowable deduction in terms of sec. 51(1). As the learned Judge said at p. 4186:
``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, to be regarded as outgoings incurred in gaining assessable income.''
The question of university enrolment fees paid for subjects in the Faculty of Arts also arose for determination. It appears that the taxpayer's lack of success in passing examinations and the uncertainty of promotion led to the conclusion that the relationship between those expenses and
ATC 205the assessable income was too problematical and remote. In the present matter, we are of the view that the taxpayer, bearing in mind the promised elevation in status and salary, spent money to earn more, and that the nexus between his assessable income and the cost of travel abroad was sufficiently proximate (see
F.C. of T. v. Smith 78 ATC 4157).
13. In F.C. of T. v. White (supra), Helsham J., at p. 4022, made the following statement after reviewing the decisions in Finn and Hatchett:
``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.''
Our understanding of the evidence presented in the current reference was that the expansion of the taxpayer's knowledge and experience which resulted from the visit to China was primarily responsible for the appointment made at the beginning of the second term in 1980, and that the new position awarded to the taxpayer carried a substantial increase in salary. Accordingly, it seems to us that the expenditure for fares and accommodation qualifies as a deduction under the second part of the judicial pronouncement made by Helsham J.
14. It appears that the tape recorder, tapes and teaching aids, purchased by the taxpayer during the tour of China, were used solely in connection with the taxpayer's activities as a teacher of Chinese history, and that the possession of those items did play a role in his appointment to the position of senior master. We consider that the expenditure was incurred in the process of carrying out his duties as a professional employee, and that such outgoings can be seen to have had an effect on the taxpayer's income. For those reasons, we conclude that the amount of $124 is properly deductible under sec. 51(1). It was part of the Commissioner's submission that the cost of the tape recorder ($40) represented an outgoing of a capital nature, and that, therefore, no deduction is permitted in terms of sec. 51(1). It was inferred that the recorder constituted an item of plant as defined in sec. 54 and that it would be more appropriate in the circumstances to claim a deduction for depreciation. However, in recognition of the small amount expended on the acquisition of this item, we consider that the amount of $40 is an allowable deduction under sec. 51(1).
15. For the reasons detailed above, we direct that the assessment before us be amended to allow a deduction of $1,920.