Martin v. Federal Commissioner of Taxation.

Bowen CJ

Toohey J
Lockhart J

Full Federal Court

Judgment date: Judgment handed down 16 July 1984.

Bowen C.J., Toohey and Lockhart JJ.

The issue before the Court is the entitlement of the taxpayer to a deduction from her assessable income of expenses incurred by her with kindergartens in caring for her child while she was at work. In the Supreme Court of New South Wales the taxpayer's claim to a deduction was rejected (83 ATC 4722) and she appeals against that decision.

A number of such cases have come before Boards of Review in recent years and indeed the present taxpayer's claim was rejected by such a Board (Case P13, 82 ATC 60) before it came before the Supreme Court. The basis for the rejection of the present taxpayer's claim was the decision of Mason J. in
Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171. Since Lodge played such a prominent part in the submissions of counsel for the taxpayer and the Commissioner before this Court, it is of some importance to appreciate the factual context in which the judgment of Mason J. was delivered.

During the relevant year of income Miss Lodge derived income from the preparation of bills of cost which she prepared under contract for a partnership known as Law Cost which in turn prepared such bills for Melbourne solicitors. She lived on her own in a suburban flat which was large enough to allow her to carry out the work of examining and analysing solicitors' files. She had an infant daughter who turned 2 early in that year. Miss Lodge hoped to do her work without sending the child to a nursery but, in the end, found that this was not possible because of the demands made on her time by the child when she was awake. In the early part of the tax year the child was in a nursery for 2 days a week and thereafter for 5 days a week.

After examining a number of authorities, Mason J. reached this conclusion at ATC p. 4176; C.L.R. pp. 175-176:

``In the light of the authoritative observations concerning sec. 51(1) made by this Court in its earlier decisions I have no alternative but to arrive at the conclusion that the appellant's claim in this appeal cannot succeed. The expenditure was incurred for the purpose of earning assessable income and it was an essential prerequisite of the derivation of that income. Nevertheless its character as nursery fees for the appellant's child was neither relevant nor incidental to the preparation of bills of cost, the activities or operations by which the appellant gained or produced assessable income. The expenditure was not incurred in, or in the course of, preparing bills of cost.''

In the case now before this Court, counsel for the taxpayer submitted that Lodge had been wrongly decided and that this Court could and should decline to follow it. Alternatively, he submitted that Lodge was distinguishable from the present appeal on the facts.

Counsel for the taxpayer referred us to a number of decisions relating to travelling expenses to and from work and also incurred in overseas travel for the purpose of improving the taxpayer's capacity to perform his particular duties and to enhance his prospects of promotion. With respect, we do not find an

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examination of this ``wilderness of single instances'' helpful. We think it important to go to the language of subsec. 51(1) of the Income Tax Assessment Act 1936 and apply that language to the facts of the present appeal.

As the present taxpayer was at all relevant times an employee, the expenses which she incurred are allowable deductions:

``... to the extent to which they are incurred in gaining or producing the assessable income... except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature....''

The meaning and scope of subsec. 51(1) have been considered in many decisions. It is enough, for present purposes, to refer to two only of those decisions.

Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at pp. 56-57, the High Court said:

``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 sub-section 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.''

Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478, Williams, Kitto and Taylor JJ. rejected the proposition that expenditure which is a prerequisite to the earning of a taxpayer's income is necessarily expenditure incurred in, or in the course of, gaining or producing the income. At p. 499 their Honours said:

``Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.''

The present appeal falls to be determined by a consideration of subsec. 51(1) as construed by the High Court in Ronpibon and Lunney. The relevant tax year is the year ended 30 June 1979. The taxpayer's child was born on 20 April 1975. The taxpayer returned to the workforce in 1977 and was employed by the New Zealand High Commission until 11 August 1978. She was employed by the Woden Radiology Service from 9 August until 24 August 1978 (the slight overlap in dates was not explained and is not material). On 15 January 1979 she began work with the ACT Electricity Authority and was still employed by that body at the end of the tax year. The taxpayer's child was in kindergarten during each period of employment and, it would appear, only during each such period. The taxpayer was separated from her husband. The precise date of separation did not appear, the taxpayer saying that she and her husband were ``first separated towards the end of 1978''. Counsel made no point in argument of the precise date of separation or indeed of the fact of separation itself.

It may be accepted that the placing of her child in a kindergarten (and the incurring of expenses thereby) was a prerequisite to the taxpayer's employment. It was not suggested that any other course was open to her if she was to take on any of the three jobs in question. But it is clear, at least since Lunney, that such a consideration is not of itself sufficient to attract the operation of subsec. 51(1). And it was for that reason that in Lodge Mason J. rejected the taxpayer's claim. The character of the expenditure in that case was found by his Honour to be neither relevant nor incidental to the particular work upon which Miss Lodge was engaged.

In our view the same considerations operate to preclude acceptance of the taxpayer's claim in the present appeal. The expenditure incurred in kindergarten fees was a prerequisite to the taxpayer's employment in the sense that it allowed her to take on the jobs in question. But there was nothing about the expenditure which was relevant or incidental to the work which she was engaged to perform. The expenditure was not incurred in, or in the course of, performing the work for which she was employed, that of a steno secretary.

Faced with this obstacle, counsel for the appellant sought to distinguish Lodge by contending that, in the present appeal, the evidence showed that the taxpayer's employers required, or at any rate were seen by the

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taxpayer to require, appropriate child care arrangements before she would be employed. Counsel referred to the judgment of Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494, in particular his Honour's statement at ATC p. 4187; C.L.R. p. 499 that ``there must be a perceived connection between the outgoing and assessable income''. Menzies J. was dealing with the deductibility of expenses incurred by a teacher in the submission of theses for the purpose of gaining a Teacher's Higher Certificate and in university fees for subjects in the Faculty of Arts. In the submission of counsel, the requirement by the employers of child minding arrangements constituted a ``perceived connection'' between the nursery fees and the taxpayer's assessable income.

We do not accept this submission. To begin with, we do not believe that Menzies J. was purporting to substitute some new test for the principles well established in earlier authorities. In the passage in which the words quoted appear, his Honour was at pains to make it clear that he was not dealing with some general question of the deductibility of university fees but ``the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible''. His Honour went on to say that he was unable to find any connection beyond the circumstance that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is more likely thereby to obtain promotion. His Honour then said:

``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.''

We agree with the statement of the learned primary Judge in the present appeal that his Honour was not saying that such a connection was sufficient by itself and that, in the language of the Act, the expenditure must be ``incurred in gaining or producing the assessable income''.

In any event, the evidence goes no further than to show that, at the time of interviews for employment, the taxpayer was asked if she had a child and what arrangements she intended to make for his care if she was offered a job. The generality of the questions asked and the answers given suggest no more than that the employers in question were concerned that the taxpayer would be able to carry out her duties without family distractions. The evidence does not justify a conclusion that, in the case of any of the three jobs in question, the making of satisfactory arrangements for her child was a condition or was seen by the taxpayer to be a condition of her engagement.

In our respectful view, the decision of Mason J. in Lodge is consistent with Ronpibon and Lunney and those other cases in which sec. 51 has been considered. The taxpayer has not established that the money expended by her in kindergarten fees was more than an expenditure incurred in order to free her to take on the work in question. The character of the expenditure was such that it was neither relevant nor incidental to the work which she was engaged to perform and it was therefore not incurred in, or in the course of, that work.

In our view the appeal must be dismissed with costs.


1. The appeal be dismissed.

2. Lorraine Cheryl Martin pay to the Commissioner of Taxation of the Commonwealth of Australia his costs of the appeal.

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