Federal Commissioner of Taxation v. Klan.

Ormiston J

Supreme Court of Victoria

Judgment date: Judgment handed down 4 February 1985.

Ormiston J.

Julian Stanley Klan, the respondent to this appeal by the Commissioner of Taxation, sought to deduct $3,483.50 from his assessable income for the year ended 30 June 1981 as removal expenses consisting of the cost of travelling to the United Kingdom, together with his wife and child, and the cost of removing his luggage from Burleigh Heads in Queensland to Colwyn Bay in Wales, in order to enable him to take up a teaching position at the Rydal School and incidentally to complete research on a thesis which would qualify him to commence a Master of Arts degree. The appellant Commissioner of Taxation disallowed the claim for a deduction when making his assessment dated 26 November 1981. Mr Klan, in an extensive letter written from London on 4 January 1982, objected to the disallowance of this claim, and in turn the Commissioner disallowed the objection on 8 March 1982. The matter was referred by the respondent to the Taxation Board of Review No. 2 [reported as Case Q69,
83 ATC 349] and that Board on 3 August 1983 determined to allow the claim to the extent of $1,742. The Commissioner of Taxation has appealed to this Court and Gobbo J. has already determined, on 28 March 1984, that questions of law are raised on this appeal.

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He also allowed the appellant to file an amended notice of appeal dated 28 March 1984.

Mr Klan is a schoolteacher who is presently the head of the history department at the Mentone Grammar School. In 1980 he was a house-master at the Southport School at Southport in Queensland. With the encouragement of the headmaster of that school, he resolved in 1980 to improve his teaching qualifications by seeking a post as head of a history department in a school in the United Kingdom. His original plan was to seek an appointment of that kind and to remain teaching in the United Kingdom for three or more years before seeking an appointment as a headmaster to a school in Australia. His applications to become head of a department in a British school were unsuccessful, primarily, in his opinion, because he was unable to be present for an interview for any of those appointments. Towards the end of 1980 he changed his plan in that he sought an ordinary teaching appointment at an independent school, that is a school within what is known as the headmasters' conference, for a period long enough to enable him to apply and be present for an interview for positions as head of a history department in a British school. His plan was otherwise unchanged, except to the extent that it might be necessary to extend his stay in the United Kingdom while waiting to become head of department. After answering an advertisement in the Times Education Supplement, he was offered a position at the Rydal School at Colwyn Bay, Clwyd, accepted it and resigned his position at the Southport School on 11 November 1980. He was to take up his position at the start of second term in early January 1981 and so he finished his year at the Southport School in the last week of November 1980, although he was paid to 31 December 1980.

Mr Klan then booked a fare by the cheapest available way to the United Kingdom, by ``ship-jet'', and set off with his wife and small child on 27 December 1980. After spending overnight in an hotel on the way in both Singapore and London, he eventually arrived in Colwyn Bay in early January 1981. Unfortunately he had been led to believe that he could obtain a work permit from the Home Office on his arrival in the United Kingdom. Immediately on his arrival at Heathrow he was disabused of that notion and was permitted to enter the United Kingdom for two months on condition that he did not undertake any paid employment without permission of the Home Secretary. He applied for a work permit and in the meantime he helped with some of the teaching and other work at Rydal School in return for full board and accommodation for himself and his family. It was many months before the work permit was eventually issued, early in May, permitting him to be employed from 1 May and was current only to 30 September of that year. Later the work permit was extended to 31 December 1981. Consequently he could be and was paid for his teaching work at the Rydal School from 1 May 1981. Of course, his salary for teaching at the Rydal School was income derived in the United Kingdom and thus was subject to income tax in that country. It was not disputed that that income was exempt income within the meaning of the Income Tax Assessment Act 1936.

The Rydal School, at which Mr Klan had arrived in early January 1981 with his family, was a small English language school on the north coast of Wales. It was a co-educational boarding school with some 320 pupils. It was run by the Methodist Church and was, as Mr Klan described it, an ``academic'' school. Mr Klan lived with his family in an attic in one of the boarding houses designed for the use of a house tutor, whose functions he performed until he was able to teach English literature and European history both at A level and scripture at O level.

Mr Klan next attempted to put into effect his alternative plan, that is, to seek appointment as head of a history department at a school in the United Kingdom. However, the absence of a work permit proved again a stumbling block. He applied to several schools but each told him that they could not give him a position until he had a work permit. On the other hand, the Home Office informed him that he would not be given a general work permit as it would only be issued for a particular position. Moreover, as he had no permit and did not otherwise qualify for one, he was told that it had to be established before he could be appointed to a particular position that there was nobody else in either Britain or the European Economic Community who could fill the particular position. Either way he saw no prospect of obtaining a position as head of a history department and he realised that he would have to return to Australia when the work permit

ATC 4062

issued to him for the Rydal School eventually expired. Consequently he began to look for positions at schools in Australia and saw his present position at Mentone Grammar School advertised in the Times Education Supplement. He was interviewed for the position in June by the headmaster, Mr Jones, and was offered the position on 1 July 1981, commencing at the beginning of the next academic year in Australia. He sought and was offered two other positions in Sydney but eventually accepted his present post as head of the history department at Mentone Grammar. He finished teaching at the Rydal School on 15 December 1981 and immediately returned to Australia.

During his visit to England, Mr Klan also visited other English public schools, especially their history departments, and attended the Westminster conference, which was a conference of headmasters and chaplains of all Methodist schools in Britain. Further, he was able to carry out some of the research which he had hoped to do in Europe in order to complete the qualifying degree for a Master of Arts degree at an Australian university. This qualifying course was necessary because he had obtained only a pass degree as Bachelor of Arts from the Queensland University. He had done two subjects by course work and had been required to complete a 35,000 word thesis in order to qualify and go on to a Masters degree. The subject of his thesis was ``The Accepted Lutheran Doctrine of Resistance and the behaviour of the Evangelical Churches in Germany, 1933-1945''. He had done considerable research in Australia but had exhausted the materials available at the university libraries and at the Australian National Library. Other materials were only available in specialist libraries in England and on the continent of Europe and he wished to interview a number of people who were directly involved in the German Evangelical Church at that time.

This part of Mr Klan's visit to Europe was more successful. Not only did he visit the archives of the German Evangelical Church in Stuttgart but was also able during the school holidays to visit scholars and specialist libraries at the Universities of Oxford, Cambridge and London. In addition these scholars were able to introduce him to various people who had been directly involved in the Church struggle in Germany. Consequently, on his return to Australia he was able to submit his thesis by February 1982, for which he was awarded the equivalent of first class honours. Subsequently he was admitted ad eundum statum to Melbourne University where he is presently working on a thesis for a Master of Arts degree.

Mr Klan's own clearly conceived purpose for this visit to Europe was to qualify him for appointment to a senior position in an independent school in Australia. Both the first and second versions of the plan envisaged him obtaining a position as head of a department in a British school and returning after three, four or five years' experience to a post as headmaster of an independent school in Australia. It was only when those two plans were thwarted by the problems in obtaining a work permit that he settled for seeking a post as head of a department after only one year away. Nevertheless, even in its abbreviated form, he gained one year's teaching experience in an English public school and was able to do considerable research to complete his thesis. All this was done at considerable financial sacrifice and inconvenience, since the salary paid at English schools was substantially less than he had been receiving as a house-master in Queensland and he had to pay for the cost of moving with his wife and small child to the other side of the world. Although the deduction originally claimed included the amounts paid in respect of his wife and child, the claim was reduced during the course of hearing to his own costs of travel and removal expenses amounting to $1,683.

From the evidence it seems clear that Mr Klan's visit to Europe was worked out with some care and after taking advice from a number of people. Mr Day, his headmaster at the Southport School in Queensland, had a similar experience before obtaining his post in Queensland and Mr Klan's enquiries revealed that a large number of headmasters in Australia had had teaching experience overseas, and especially in the United Kingdom, before becoming headmasters of their Australian schools. The completion of the thesis was in a sense secondary but was also directed to obtaining a Masters degree which he thought would more adequately fit him for the post of headmaster at an Australian school. His own perceptions as to the need for such qualifications were supported in evidence by the headmasters of Melbourne Church of England Grammar School and Mentone Grammar School and by Mr P.A.V. Roff, an

ATC 4063

educational consultant and formerly principal of Scotch College. I do not feel it necessary to set out what those eminent teachers said in evidence but I should say that I accept entirely their evidence that Mr Klan's proposed and actual experience was both desirable and necessary for advancement in the education system of the independent schools. In summary, their evidence indicated that, at least amongst Protestant independent schools in Australia, a large majority, in excess of perhaps three-quarters, of headmasters of independent schools have had overseas teaching experience in the course of their careers. Moreover, all three witnesses were clearly of the opinion that the experience of teaching in an English independent school would confer a decided advantage on an applicant for a senior position in an Australian independent school. So far as Mr Klan was concerned, they thought that his plans were a clear indication of his sense of vocation and professional ambition. Mr Jones in particular was impressed with this at the time that he appointed him to be head of the history department at Mentone Grammar School. Already it appears, only two years after his return to Australia, that he has been placed on a short list of only two applicants for an appointment as headmaster of an independent school in Australia.

The issue in this appeal is whether the expenditure incurred by the taxpayer, Mr Klan, in paying travelling and removal expenses to the United Kingdom is properly deductible from his assessable income for the year ended 30 June 1981 under sec. 51 of the Income Tax Assessment Act 1936.

Subsection (1) of that section 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.''

Conventionally sec. 51(1) is divided into two limbs, the first of which is applicable generally to taxpayers and the second of which is confined to those who are carrying on a business. The word ``business'' is widely defined in sec. 6(1) of the Act as including ``any profession, trade, employment, vocation or calling, but does not include occupation as an employee''. The words ``employment'' and ``employee'', though formed from the same root, connote different uses of the same term, and the exception excludes the present taxpayer, whose career both in the past and in the planned and foreseeable future is that of a teacher employed at a salary by independent schools. It was but faintly argued that the vocation of a school teacher could properly be described as a ``profession'' within the meaning of the definition but, whatever may be the merit of that argument outside the present context, the exception clearly leads to the conclusion that the taxpayer has not, and does not in the future, contemplate carrying on a business within the meaning of the definition and of sec. 51(1).

Although it has been said on high authority that the second limb adds but little to the operation of the first limb, there does remain some distinction both in expression and operation between the two limbs: cf.
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56;
John Fairfax & Sons Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at p. 40 and
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4071; (1975) 132 C.L.R. 175 at p. 197. What must be established by the taxpayer in the present case is that the cost of his travel and removal to the United Kingdom were outgoings which were ``incurred in gaining or producing the assessable income'' of the taxpayer, subject to the exceptions set out in sec. 51(1). The language of sec. 51 has been subject to careful analysis on many occasions and it is important to remember that whatever has been and will be said as to the interpretation of the section is only a gloss on the words of the section. Subject to that comment a number of principles can be stated as to the first limb: in the first place for an outgoing to be deductible, it must be an outgoing incurred in the course of gaining or producing assessable income and must be incidental and relevant to that end: Ronpibon Tin N.L. v. F.C. of T. (supra) at pp. 56-57;
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 351;
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68. Secondly, to come within the meaning of the first limb of the subsection, it is both sufficient and necessary that the occasion of the outgoing

ATC 4064

should be found either in whatever is productive of assessable income, or if none be produced, in whatever would be expected to produce assessable income: Ronpibon Tin N.L. v. F.C. of T. (supra) at p. 57; A.G.C. (Advances) Ltd. v. F.C. of T. (supra) at ATC p. 4072; C.L.R. p. 198. Moreover, it is important to remember in a case such as the present, where the taxpayer's plans for the future and the purpose and object of a particular expenditure is in question, that fundamentally the taxpayer's state of mind, whether intention or purpose or motive, is evidentiary only but as such may have a significant role in ascertaining the character of expenditure in any specific case. This matter has been most clearly expressed, in my respectful opinion, by Brennan J. (when a member of the Federal Court) in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at pp. 4544, 4549 and 4551-4552; (1980) 49 F.L.R. 183 at pp. 185, 193 and 196, where he concluded:

``Given a sufficient identification of what the expenditure is for and the character and scope of the taxpayer's income earning undertaking or business, the question whether expenditure is incurred for the purpose of carrying on a business or for the purpose of gaining or producing assessable income does not depend upon the taxpayer's state of mind. The relationship between what the expenditure is for and the taxpayer's undertaking or business determines objectively the purpose of the expenditure. In cases to which a reference to purpose is required or appropriate, objective purpose will be found to be an element in determining whether expenditure is incurred in gaining or producing assessable income or in carrying on business.''

Again, in
F.C. of T. v. D.P. Smith 81 ATC 4114 at p. 4117; (1981) 147 C.L.R. 578 at pp. 585-586, Gibbs C.J. and Stephen, Mason and Wilson JJ. stated:

``The section does not require that the purpose of the expenditure shall be the gaining of the income of that year, so long as it was made in the given year and is incidental and relevant to the operations and activities regularly carried on for the production of income. What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character, and generally to its connection with the operations which more directly gain or produce the assessable income.''

In the present appeal this question of purpose is clearly enough raised, for the respondent's evidence was almost solely directed to establishing the purpose of his visit to the United Kingdom and the reasonableness of that visit both as originally planned and as it was eventually carried out. The respondent's difficulty in the present case lies in the fact that, in applying the tests derived from the Ronpibon case (supra), it is not easy to see that the outgoings constituted by his removal expenses to England were incurred in the course of gaining or producing his assessable income, nor that they were incidental to that end, albeit that they had some relevance to the earning of assessable income at a time in the future. Furthermore, it is difficult to see that the occasion of these payments was to be found in anything which directly produced the taxpayer's assessable income, although on a long-term basis its object was to enable him to secure a post which would be more remunerative.

It is obvious that the payments were made in a year in which assessable income was earned, but it is equally clear that they were in no way incidental and relevant to the earning of his salary at the Southport School in Queensland. The expenditure was incurred after he had resigned from that post, although perhaps a day or so before he left his teaching post at that school. If they were immediately incidental and relevant to the earning of any income, it was the earning of his somewhat delayed stipend at the Rydal School in Wales. Even then they were payments preliminary to taking up that position, but the most obvious objection argued on behalf of the Commissioner was that such income was exempt income and outside the operation of sec. 51.

The taxpayer, however, argued that the Court is entitled to look further at the real object of his visit to the United Kingdom. The income earned there was far less than he could have expected to earn in Australia and the object was to gain invaluable teaching experience of a kind which on the evidence was clearly viewed with great favour by headmasters and councils of independent

ATC 4065

schools who have been and will be responsible for engaging him as a headmaster or teacher. Even the subsidiary purpose of his visit, to obtain materials for his thesis, was said to have been carried out with the long-term, and in the event the short-term, object of persuading those employers that he was a teacher out of the ordinary and thus deserving of appointment to senior and better-remunerated positions.

The question of the relationships to the earning of exempt income cannot be ignored, but it is first necessary to determine whether the taxpayer can justify the deduction upon the basis on which he seeks to rely. He principally relied on F.C. of T. v. Finn (1961) 106 C.L.R. 60 and
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494 (Menzies J.) and a series of cases which were said to follow the reasoning in those cases. In particular, it was asserted that, on a proper understanding of those cases, it was sufficient to demonstrate a ``perceived connection'' between the expenditure and the earning of assessable income generally: cf. Hatchett's case (supra), at ATC p. 4187; C.L.R. p. 499. It is not difficult to perceive a connection between these payments and the earning of assessable income in future years and indeed between the experience gained in Wales and his employment at Mentone Grammar in the year ended 30 June 1982. As I have said, the evidence clearly established Mr Klan's purpose and motive and that Mr Jones' decision to employ him at a higher salary than he had earned either in Australia or Wales was based in part, if not on the experience directly gained by Mr Klan, at least upon the demonstration by him of initiative in seeking jobs in Britain and of his application to serious research on his thesis.

However, perception of a connection between expenditure and the future earning of assessable income is not, in my opinion, sufficient. In all cases the words of the statute must be considered and it is dangerous to accept a gloss on those words as if they are substituted in the Act itself.

Although in a number of recent cases the ``perceived connection'' test has been applied, doubt was expressed by David Hunt J. in
Martin v. F.C. of T. 83 ATC 4722 at pp. 4724-4725 whether Menzies J. in Hatchett's case (supra) intended to lay down any new or independent test. Hunt J. in emphasising the requirement that an outgoing must be shown to have been incurred ``in or in the course of'' gaining the taxpayer's assessable income, stated that a finding of a ``perceived connection'' between the outgoing and the assessable income is not and was not intended by Menzies J. to be sufficient by itself to justify a deduction. These views have recently been endorsed by the Full Federal Court on appeal in Martin's case 84 ATC 4513 where it was said by the Court that they did ``not believe that Menzies J. was purporting to substitute some new test for the principles well established by earlier authorities''; per Bowen C.J., Toohey, Lockhart JJ. at p. 4516.

It follows that a number of cases in which that test was applied to allow the deduction of what are called ``self-education'' expenses may have to be reconsidered, although it is not necessary for me to express any opinion whether they were correctly decided: see
F.C. of T. v. Kropp 76 ATC 4406 at pp. 4410-4411;
F.C. of T. v. Smith 78 ATC 4157 at pp. 4161-4162 (``real connection'');
F.C. of T. v. Lacelles-Smith 78 ATC 4162 at p. 4163 (``clear connection'');
F.C. of T. v. Highfield 82 ATC 4463 at pp. 4470, 4472;
F.C. of T. v. Wilkinson 83 ATC 4295 at pp. 4301, 4303: cf.
F.C. of T. v. White 75 ATC 4018 at p. 4022. More importantly, the Board of Review in the present case explicitly relied on that test to allow the claimed deductions. To the extent that it relied on the ``perceived connection'' test as the appropriate test of deductibility, I consider the Board was in error.

What I have said, and what the Federal Court said in Martin's case (supra), does not, however, deny that connection is sometimes an appropriate means of testing whether a loss or outgoing was incurred in the gaining or producing of assessable income. As was stated by Dixon C.J., Williams, Webb, Fullagar, and Kitto JJ. in Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 351:

  • ``Phrases like the foregoing'' (scil. ``natural or recognised incident'') ``or the phrase `incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income.''

    ATC 4066

It may be noted that what was intended in that case to be an application of the ``incidental and relevant'' test to losses appears to have become the progenitor of both the ``perceived connection'' test and the ``essential character'' test adopted by the majority in
Lunney v. F.C. of T. (1958) 100 C.L.R. 478 at p. 497, each test expressed as generally applicable to outgoings as well as losses. However, the passage quoted above was cited with approval in a recent High Court decision on outgoings: F.C. of T. v. D.P. Smith 81 ATC 4114 at p. 4117; (1981) 147 C.L.R. at p. 585 per Gibbs C.J., Stephen, Mason and Wilson JJ. That citation immediately precedes the passage quoted earlier in this judgment, which poses tests as to the deductibility of outgoings both of ``nature and character'' and ``connection''. However, from their context it is apparent that these tests were intended as explanatory of the Ronpibon tests rather than as posing a new or independent test in relation to losses or outgoings. The same might be said of the ``essential character'' test relied on by the Commissioner, the helpfulness of which I have doubted elsewhere (see
Mayne Nickless Ltd. v. F.C. of T. 84 ATC 4458). Nevertheless it has been applied on occasions in appellate courts: cf.
Handley v. F.C. of T. 81 ATC 4165 at pp. 4169, 4171; (1980-1981) 148 C.L.R. 182 at pp. 190, 194;
F.C. of T. v. Forsyth 81 ATC 4157 at p. 4163; (1981) 148 C.L.R. 203 at p. 214; Martin v. F.C. of T. 84 ATC 4513 at p. 4515. The test, as I understand it, at least emphasises the necessity of establishing that an outgoing or loss satisfies the test imposed by the language of sec. 51(1) itself.

The question remains whether these removal expenses were outgoings incurred ``in gaining or producing the assessable income''. The relationship to the gaining of ``the assessable income'' might appear the first difficulty facing the taxpayer. In a temporal sense the expenditure was incurred in the last month of his employment at the Southport School and was in no way incidental or relevant to the earning of his salary from that school. Nor was any assessable income earned until the beginning of 1982, the whole of his earnings in the United Kingdom being exempt income. The gaining of a position at the Rydal School was the immediate consequence of the payment of the removal expenses.

It is, however, said that the long-term object was the earning of income in Australia in a higher teaching position and at an increased salary. It became somewhat less of a long-term plan when the original plans fell through and the taxpayer looked for a post in Australia starting in 1982, but I doubt whether this affects the characterisation of the outgoings. The income which is said to have been gained or produced by this expenditure was therefore assessable income earned in a later financial year, if not three to five years later as originally intended, than in fact in the financial year ended 30 June 1982.

The words ``incurred in gaining or producing assessable income'' might appear to point to a close relationship between an outgoing and the relevant income. This conclusion might, on the surface, also be supported by the interpretation given to the first part of that expression. Those words mean, as has been stated many times, ``in the course of gaining or producing the assessable income'' (emphasis added): Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (supra) at p. 349; see also the Ronpibon case (supra) at p. 57 and F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68. This gloss would appear to place some temporal restriction on the relationship between the loss or outgoing and the income to which it is required to be incidental and relevant. However, by a further process of exposition ``the assessable income'' has also been expanded so as to delete, for practical purposes, the definite article and enable the reference to ``the assessable income'' to be read as a reference to assessable income of the taxpayer generally, without regard to division into accounting periods: per Mason J. in A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4071; (1975) 132 C.L.R. 175 at p. 197, in whose judgment on this point Barwick C.J. agreed (at ATC p. 4066; C.L.R. p. 189).

This conclusion was first reached tentatively in the Ronpibon case (supra) at p. 56. Later in F.C. of T. v. Finn (supra), upon which the taxpayer relied, Dixon C.J. stated (at p. 68):

``The better view, however, is that sec. 51 as now drawn does not in either limb require a rigid restriction to the gaining or producing of assessable income of the current year.''

Although the A.G.C. case (supra) might be confined to losses and to those incurred in the earning of income in past years by a business, the course of authority clearly binds me to hold

ATC 4067

that ``the assessable income'' referred to in the first limb is apt to include such income earned both in past and future years.

Moreover I do not find, upon proper analysis, that the words quoted earlier and used by the majority of the High Court in F.C. of T. v. Smith (supra) at ATC pp. 4117-4118; C.L.R. pp. 585-586 affect this conclusion. That case concerned the deductibility of a premium for a renewable personal disability policy which was unlikely to and did not produce assessable income in the year in which the premium was paid. The requirement of the majority that the expenditure should be ``incidental and relevant to the operations or activities regularly carried on for the production of income'' was held not to require that the purpose or effect of the payment should be the gaining of assessable income in that year. Their approval of Toohey J.'s reasoning in the Federal Court in Smith's case 79 ATC 4553; 38 F.L.R. 115 makes that conclusion clear.

However, there remains to be established whether the presently claimed expenditure is sufficiently related to the earning of assessable income to be described properly as having been incurred ``in'', i.e. in the course of, gaining or producing that income. Applying the language of the majority in Smith's case (supra) there is doubt as to whether the payment of the removal expenses was incidental and relevant to any operations or activities regularly carried on for the production of assessable income. Taking a broad approach, it could be said that teaching was the activity carried on by the taxpayer over the years for the gaining of assessable income. However, although Mr Klan taught throughout his period overseas, he did not earn assessable income during that time, and there was, both in planning and execution, a clear break in his employment so that the the payments were clearly not incidental and relevant to the gaining of assessable income in the period of the break. This appeal is quite different from Finn's case (supra) where an architect travelled overseas to increase his professional knowledge during his long-service and recreational leave and returned thereafter to the same position.

On the other hand, if one looks to the gaining and producing of assessable income in the future, there can be little doubt that the motive, object and purpose of the taxpayer was to equip himself the better to carry out his teaching activities on his return and thereby earn a higher assessable income. But was the expenditure incurred ``in'' or ``in the course of'' gaining or producing that future income, or was it incidental and relevant to that end? Relevant it may have been to his new post, but it is difficult to characterise the payments as incidental to the earning of income in that post.

In truth what the expenditure related to was the obtaining of a new position either as headmaster, or, as events have so far turned out, as head of a department. Regrettable as it may seem, ``the cost to an employee of obtaining his employment does not form an outgoing incurred in the course of earning the wages payable in the employment'': per Barwick C.J. in
F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426. Moreover there is a difference of fundamental importance between obtaining a new appointment and seeking preferment to a higher or different, but better paid, position with the same employer. All the cases but one, upon which the taxpayer relied, were cases involving self-education or overseas travelling expenses directed to obtaining new or better paid appointments with the same employer and were in the language of Menzies J. in F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at p. 498 cases in which the taxpayer, ``in reliance upon the conditions of his employment, spent money to earn more''. The one exception, F.C. of T. v. Kropp 76 ATC 4406, was similar to the employee cases, but for the fact that the taxpayer resigned from the Australian firm of Price, Waterhouse and Co. to take up a position for two years with the Canadian related firm of the same name, and then returned as a manager of another Australian office of the firm. The expenditure in moving to Canada was claimed as a deduction but was described by Waddell J. at p. 4411 as being made in the course of carrying out a plan to acquire overseas experience ``at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of this salary in his remaining professional life would be accelerated''. These considerations point to the conclusion that the object and effect of his plan was not to seek new employment and the break in his employment was dictated by the organisation of the accounting firm. If it stands for more, I would not follow Kropp's case, especially in the light of the learned Judge's reliance on the ``perceived connection'' test.

ATC 4068

In the end, therefore, it is a question of characterising the acts of the taxpayer as being either incidental and relevant to operations and activities carried on for the earning of assessable income or as a means of obtaining a contract of employment with a new employer. I have little doubt that Mr Klan's plans both as originally envisaged and as carried out were directed to the latter end. They were not mere incidents to his employment.

The distinction may seem unfair in the sense that in some occupations costs incurred in better equipping or qualifying taxpayers may be deductible according to whether they are employed at a salary or are self-employed. Though Dixon C.J. in Finn's case (supra) at p. 64 thought one should not be in a worse position than the other, he recognised that ``as the legislation stands such cases cannot, unfortunately, be determined by any broad proposition of law'' and must depend on the proper construction of the section. Although there are elements in Finn's case which are similar to the present, four factors were relied on by the Chief Justice which when ``considered in conjunction'' did ``seem to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income'' (at p. 65). One of these, also relied on by Kitto J. (cf. at pp. 67, 69), was that the expenditure was incurred while he remained with the same employer and acted in accordance with the conditions of that employment. Windeyer J. (at p. 20) appeared to rely on the second limb in describing the expenses as ``necessarily'' incurred ``in carrying on his profession or calling''. With respect, as Menzies J. pointed out in Hatchett's case (supra) at ATC p. 4188; C.L.R. p. 501, that does not appear an appropriate basis, as I have already stated.

The limits of Finn's case are referred to in Menzies J.'s judgment in Maddalena's case (supra) at ATC p. 4163; A.L.J.R. p. 427, in which Barwick C.J., Windeyer, Owen and Walsh JJ. agreed. The latter case involved the cost of travel to obtain new contracts of employment as an electrician and a professional footballer. After having decided that the latter occupation was carried on pursuant to contracts of service, Menzies J. observed that there was a difference ``of first importance'' between a person who seeks work as an employee and one who seeks contracts to do work as a principal.

He stated (at ATC p. 4163; A.L.J.R. p. 427):

``Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business.''

Although the deduction claimed in Maddalena's case was for rather mundane expenditure, the principles there stated are directly relevant to the present case and they solve the temporal dilemma posed by the requirement that outgoings should be incurred ``in'', i.e. in the course of, gaining or producing assessable income. It is one thing to assert that it is unnecessary that the outgoing need produce, as a matter of causation, assessable income in the year in which the outgoing was incurred. It is quite another to say that expenditure incurred which is entirely unrelated to existing activities which produce assessable income can come within the section because its object and long-term effect is better to equip the taxpayer to earn income in the future. In my opinion, the taxpayer's removal expenses to Colwyn Bay are properly characterised as outgoings incurred to fit him to obtain employment in new and more remunerative positions as a headmaster or head of a department on his return to Australia. It follows that, as those payments were of ``moneys spent to obtain a new employment'', they were not allowable deductions as outgoings incurred in gaining or producing assessable income: cf. per Menzies J. in Maddalena's case at ATC p. 4163; A.L.J.R. p. 427.

This conclusion, though reached with some reluctance, is sufficient to dispose of the present appeal. The question of the relationship of this expenditure to the earning of exempt income, with which it has the closest and most obvious relationship, need not be resolved for the present. I would add only that without reference to the purpose and even motive of the taxpayer the whole question could never have been raised, for without explanation these payments clearly enabled him to take up the position at Rydal School. Arguably, even this

ATC 4069

expenditure was ``too soon'' to be incidental and relevant to that employment. Nor, in the light of my conclusion, do I believe it useful to examine whether this expenditure could be apportioned between exempt and assessable income.

For these reasons the Commissioner's appeal should be allowed, the order of the Board of Review should be set aside and the Commissioner's assessment confirmed. The respondent is ordered to pay the Commissioner's taxed costs.

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