Griffin v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
This is an appeal pursuant to sec. 196 of the Income Tax Assessment Act 1936 by a taxpayer from the decision of Taxation Board of Review No. 1 delivered on 15 November 1985 disallowing an appeal from the Commissioner who rejected a claim by the taxpayer for transport, accommodation and similar costs of a trip from Australia to Europe
ATC 4839between August and October 1981, such trip covering 46 days in all. The appellant taxpayer contended, and now contends, that his expenses (which, so far as quantum is concerned, were agreed upon at $4,008) constituted an allowable deduction by reason of the provisions of sec. 51(1) which, so far as is relevant, provides that all losses and 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 losses or outgoings of capital, or of a capital, private or domestic nature. The appellant was and is a professional electrical engineer employed by the State Rail Authority of New South Wales. He is a Bachelor of Electrical Engineering, a graduate member of the Institution of Engineers in Australia, being eligible for corporate membership of that Institution, and he is also a member of the Association of Professional Engineers, Australia. In 1966 he began with the State Rail Authority as a cadet engineer, being promoted to a class 1 engineer in 1971, to class 2 in 1976, and to class 3 in 1981. As a class 2 professional engineer he was employed in the design of high voltage transmission lines in the design office; the planning and organisation of the railway overhead wiring maintenance in the mains section; as assistant to the operating engineer in the sub-station section; and as assistant to the construction engineer in the sub-station section. As a class 3 professional engineer he has been operating engineer in the sub-station section, reporting to the sub-station superintendent; construction engineer in a like section; and construction engineer on the East Hills/Campbelltown railway from April 1985. As operating engineer of the sub-station section he was responsible for the day to day safety and operation of the railway electrical system, the protection of the electrical power system, the giving of advice to other sections on the operating and protection considerations of works being planned and under construction, and the giving of advice on new developments in the protection and operating areas. Whilst he was operating engineer he was responsible for the management of the ``trouble office'' whose task was to co-ordinate and control the electricity supply in the railway system by causing damaged transmission lines or cables to be fixed; damage to overhead wiring to be remedied; and the removal of electricity from overhead wiring transmission lines and cables to allow normal maintenance to be carried out.
In his affidavit, which was not the subject of challenge (and I should note here that the Board of Review accepted him as a witness of truth), the appellant said:
``8. In 1981, I decided on my own initiative to use part of my entitlement to long service leave and annual leave to inspect and familiarise myself with railway electrification systems in Europe. I say that the idea for this trip originated from three reports; the first, was published in May 1980 by the Australian Railway Research and Development Organisation (A.R.R.D.O.) in relation to the national electrification of railways. The second report, was also published at about the same date and dealt with the electrification of the Sydney to Melbourne Railway and a third report on the upgrading of the Illawarra line between Meeks Road and Waterfall prepared in early 1981 for the S.R.A. by Societe Francais D'Etudes et de Realisations Ferroviaires (SOFRERAIL); Societe Generale de Techniques et D'Etudes (S.G.T.E.) and the International Engineering Service Consortium Pty. Ltd. (I.E.S.C.) and which was primarily written by Professor Yves Machfert-Tassin whom I later met on my trip.
9. I say that in or about 1980 and 1981, I had done some work dealing with the power supply problems for feeding 25 kilo-volts (K.V.) alternating current (A.C.) single phase electric railways in Australia. I seek leave to refer to paras 3.1 of the A.R.R.D.O. report dated May 1980 at pp. 3.4 and 3.5 which states...
- that high voltage alternating current at industrial frequency is the most economical and efficient form of power supply for electric traction. 25 KV. a.c. has been adopted as the modern world standard and represents the most advanced and proven technology at this stage of development.'
I say that I then agreed and continued to hold the same opinion as that expressed above in the A.R.R.D.O. report. I further say, that in my opinion New South Wales
ATC 4840and indeed Australia has a very weak power system. So as to improve the quality of electrical supply to the railway overhead wiring, I planned to investigate:
- (1) the concept of using a static var compensator as a phase balancer;
- (2) voltage regulation;
- (3) load angle compensation; and the
- (4) paralleling of adjacent sub-stations.
Exhibited hereto and marked with the letters `AJG.5' are true copies of notes I made for the purposes of discussions with the Electricity Commission of N.S.W. (Ex D, before the Board of Review). I also seek leave to refer to the documents tendered as exhibit G before the Board of Review.
10. I say that the electrification of railways in N.S.W. is a direct current system. I planned and did in fact investigate the following aspects of direct current operations during the course of my trip. First, the use of inverters for 1500 volt traction; secondly, a source of supply for resistors to be used for energy dissipation purposes in sub-stations; thirdly, direct current circuit breaker practice in railway sub-stations; fourthly, 1500 volt protection philosophy; fifthly, ideas for cheap light overhead wiring for use in yards and other low speed areas and sixthly, ideas for main line overhead wiring.
11. I planned to inspect European railways which had been recently electrified and in which new developments had taken place. I did not have a planned itinerary as such; my programme was flexible, so that I would not be restricted by time in any one area. I was given an open letter of introduction by the Chief Electric Engineer, of the S.R.A. Mr L.L. Salmon, addressed `To Whom It May Concern'.
13. On 21 August 1981, I visited the Frankfurt offices of A.E.G. Aktiengesellschaft, now known as A.E.G.-Telefunken, and a member of the `50 Hz Group', which is a large manufacturer of electrical equipment in Germany. I met the head of the Railway Division (Herr Piel) and the Manager of the sub-station section (Herr Maier). I had discussions with Herr Maier on the regenerative braking of trains and resistors for cyclic duty.
14. From 22 to 27 August, I used the preparation work I had done in Sydney, to pick the route of travel from Frankfurt to Brig, Switzerland and then on to Zurich. I saw, first, different types of overhead wiring; secondly, a system which is made more elastic on sharp curves by using two pull-off arms at each mast; thirdly, the interchange between two systems being the 3000 volt. D.C. Italian system and the 15 KV. A.C. system of the Swiss Federal Railways; fourthly, the operation of a three phase line between Zermat and Gornergrat, designed for low speed electrified mountain railways; fifthly, the use of a portable turnout, which is a concept I am proposing to use in N.S.W. for sub-station sidings in A.C. electrification; and sixthly, the use of motor operated switches in feeding electricity from the sub-station to the track.''
In para. 15 the appellant deals with arrangements made with Brown Boveri, a Swiss manufacturer of railway electrical equipment, whose head office is in Zurich, Switzerland, pursuant to which, whilst in that city, the appellant spent about five hours with experts of that company in a meeting held in one of its conference rooms. The agenda for the meeting, which was tendered as an exhibit, was as follows:
``Visit of Mr Tony Griffin of SRA/N.S.W.
2. Presentation of 50 Hz Group
3. Experience with A.C. Electrification 50 Hz 25 kV
4. Dual voltage locomotives
5. Substations - Balancing of 3 phase power supply - Circuit breakers
6. Visit of locomotive assembling''
Arrangements were also made for the appellant to meet Brown Boveri's overhead wiring specialist in Munich, and with him a conference took place over about six hours on 17 September 1981.
The appellant arranged also to be introduced to engineers of the French National Railways,
ATC 4841as well as of other French companies dealing in railway electrical equipment. His affidavit continued:
``20. I was introduced by Professor Machfert-Tassin to the Deputy Director of SOFRERAIL and the Chief Engineer of S.N.C.F., M. Bergonignan and in the course of the meeting I discussed with them the application of French technology to Australian railways. In particular I discussed Professor Machfert-Tassin's report on the Illawarra line and the report of SOFRERAIL on the electrification of the Sydney to Melbourne line. SOFRERAIL was founded in 1957 by the French National Railways (S.N.C.F.) as its consulting arm to provide technical assistance on a world wide basis for railway engineering. I lunched with my hosts in SOFRERAIL's private dining room. After lunch I recall discussing the paralleling of adjacent sub-stations with a M. Balege of S.N.C.F., who was in charge of sub-stations. I was also shown the operating centre at Gare de Lyon which controls the T.G.V. (high speed) line.
21. I visited the factory of Jeumont-Schneider, which is located in Champagne-Sur-Seine a suburb in South East of Paris. It is a large French public company which manufactures railway electrical equipment. Professor Machfert-Tassin introduced me to the Chief Engineer of Jeumont-Schneider, a M. Bernard Limassat and the Manager of the company's sub-station section M. Jean-Claude Gourlot. I recall that I discussed with them the use of rectifiers, invertors and power electronics. I also discussed with them the means of absorbing energy during periods of regeneration; I was told that one solution is to use an invertor. (The S.R.A. has since my return purchased a prototype invertor which puts energy back into the A.C. system so that it can be used elsewhere.) Jeumont-Schneider is a specialist in this sort of thing.
22. On 8 September I inspected the Maurienne region between Chambery and Modane on the recommendation of Professor Machfert-Tassin and Jeumont-Schneider. This is a line up into the foothills, where they have grades similar to those between Sydney and Katoomba. Professor Machfert-Tassin said that this system could run trains which take 6000 amps each. The S.R.A. wanted to do the same thing between Meeks Road and Waterfall. It is the limit of 1500 volt technology. In this area I saw a new concept of sub-station, which was one totally outdoors. This type of sub-station required the rectifier and the D.C. breaker manufactured by Jeumont-Schneider to be placed outdoors, housed in steel cubicles. The problem with this type of sub-station was the excessive maintenance costs. To see this sub-station I had to walk to it from the station, which was about 3 to 5 km.
23. I visited Kummler & Matter A.G. in Zurich which is a manufacturer of overhead wiring equipment. I met with a M. Gilbert De Stefani, who was the Sales Manager for the Australian area. Recently this company sent a letter to the S.R.A. expressing an interest in the Darling Harbour project. This letter referred to my visit in 1981. I seek leave to refer to the letter dated 4 September 1985 from Kummler & Matter A.G. to S.R.A. which was exhibit H before the Board of Review.
24. On 12 September, I travelled to Vallorbe to inspect the method used to change from the French 25KV system to the 15KV system of the Swiss Federal Railways.
26. On 22 September, I travelled on the line between Innsbruck and Munich, which had steep grades, using an A.C. system as opposed to our D.C. system. On 23 September, I went to Goschenen and an area between Salzburg and the Swiss border. The electrification work in this area was in the process of being modernised. The problem raised here relevant to N.S.W. is the replacement of overhead wiring while you keep trains running.
27. On 27 September, I travelled from Interlaken to Kleine-Scheidegg, which is a 1500 volt D.C. system. My purpose in making this trip was first to look at the power supply arrangements and secondly, to pick up ideas for light, cheap 25 KV. yard work, where the speeds are not too important.
28. I say that the trip to Europe in 1981 assisted in enhancing my development as a professional engineer and in particular in the development of innovative and original solutions to technical problems. In my opinion the advantages which I gained from the trip were; first, the sharpening of my skill so that I could define the technical content of 1500 volt D.C. projects in both sub-stations and overhead wiring; secondly, the development of my skill in the same area for 25 K.V. A.C. systems and thirdly, the information gained from discussions with senior engineers in Frankfurt, Munich, Zurich and Paris and from observing the operation of 25 K.V. A.C. electrification in N.S.W. The trip also had the advantage of exposing me to the problems other engineers have in the field in which I practise. I further say that the origin of most new technology in railway engineering is in North America, Europe and Japan. By way of illustration the magnitude of railway electrification in Australia (2,500 km.) is about 10% of whatit is in France (25,000 km.). I seek leave to the memorandum dated 21 November 1983 from the Deputy Chief Executive, Mr R.D. Christie to Senior Officers of the S.R.A. and my reply to his letter which was exhibit K, before the Board of Review.
29. I say that the information obtained from my trip to Europe in 1981 has also been helpful to me in carrying out feasibility studies on the following S.R.A. electrification projects using alternating current instead of direct current:
- (i) The electrification of the Port Waratah to Muswellbrook line using 25 KV. AC.
- (ii) The electrification of the Wollongong to Nowra line.
- (iii) The electrification of the Maldon to Dombarton line.
- (iv) The conversion of the Emu Plains to Lithgow line from 1500 V. D.C. to 25 KV. AC.
I say that in working on these projects I have been able to apply the knowledge gained from my overseas trip to Europe in 1981.
30. I say that up to October 1981 I was the only professional electrical engineer of the S.R.A. who had comprehensively inspected the operation of 25 KV. AC. railway electrification in France and Switzerland. Since then Mr L. Twemlow, the Mains Superintendent of the S.R.A. inspected overhead wiring maintenance in Europe, Sweden and England for roughly six weeks in 1980. Mr P. Smythe the Design Superintendent of the S.R.A. in May-June 1985 spent 2 weeks in France inspecting French railway electrification and in particular overhead wiring. I have read Mr Twemlow's report on his trip in 1980 and I have had discussions with both Mr Twemlow and Mr Smythe about their respective trips.''
I have set out the foregoing matters from the appellant's affidavit in considerable detail because it is difficult to summarise it adequately and because it is highly relevant to the issue which I must determine.
In cross-examination the appellant agreed that much of the work which he did on his trip was concerned with the application of alternating current technology to railways. Asked whether anyone had requested him to prepare any submissions about that matter he replied:
``In the sort of work which I am doing you don't need to have a request. Most action is taken not on the basis of say a strict order, but that would be a good idea, how about looking into it... I am expected to use initiative.''
Asked whether he had any function in the S.R.A. in 1981 which would oblige him to make proposals for the use of A.C. electrification in New South Wales, he said: ``I was in a position to offer comment, constructive comment''. He was further cross-examined in this fashion:
``Q. Is the position this, that in regard to the various inquiries you made and the observations you made while in Europe, that their connection with your day-to-day work in the sub-station branch of the railway authority was that you were in a position, as a professional engineer, to offer suggestions to your superiors about what should be done in various areas? - A. I was in a position to
ATC 4843offer suggestions. I was also in a position to initiate action.
Q. In relation to any of the matters which you investigated on your European trip did you initiate action? - A. Yes, the results I obtained are still being applied.
Q. Have you been required by anyone superior to you in the authority to produce a report containing your photographs for their inspection? - A. My superiors have not given me the time to do a report. What instead they have done is to lump on to me all the work which could use the experience I picked up overseas. In other words, I am applying it, not just doing a report.
Q. Did you discuss with them the sort of things you had seen and heard overseas? - A. Yes, I have, and we have used it.
Q. Did you prepare any notes for your own use about the meetings you had with people in Europe or the things you observed? - A. Yes, I have prepared some minutes of some of the meetings.
Q. If we look at things like the Glenfield Junction which you have mentioned, can I take it that the design of that accords with specifications in the engineering literature and the like? - A. No, this is something that has to be designed from first principles. The sort of thing we are dealing with is not defined in literature, it is not defined in books. There are no books on the subject and those articles and technical journals are very sketchy.
Q. Is the input, if I can call it that, which you have to that design at present derived from your trip, the series of photographs you have taken of similar installations in Europe? - A. The input is in the concepts, some of which are shown in the photographs.''
The appellant said that for the purpose of making the trip in question he used his long service leave and annual leave. On two previous occasions he had travelled overseas and conducted a study of railway engineering. Much of his spare time whilst in Australia is occupied by visiting railway engineering sites and inspecting them and taking photographs. He said it was not an official requirement of the S.R.A. that he should do this ``but as I say if I don't do it, I would be unable to do a lot of the work which comes up'', and definitely of the quality which he would regard as being appropriate.
The parties agreed that the evidence given before the Board of Review should be treated as evidence in the appeal. Before the Board, Mr Salmon, who retired in December 1984 as Chief Electrical Engineer with the S.R.A., described the appellant's duties as at late 1981 as ``basically to attend to day to day operations of the electrical section''. He had given to the appellant a letter of introduction before he proceeded overseas. He said that he did not give any instructions or make any specific request to him as to what information he should seek to ascertain whilst overseas, saying ``I had no right to do so... he was on leave. After all when people are on leave, what they do is their own business''. He said that he and the appellant discussed the various problems which the branch had ``which he could possibly inspect over there''.
On behalf of the Commissioner objection was taken that there was not in the present case any question of law involved and hence no appeal lay to this Court (see sec. 196(1)). However, I am of the opinion that, there being no dispute as to the facts, the question of whether or not the expenses claimed by the appellant came within sec. 51(1) was a question of law, and that the appeal is accordingly competent - see
Hope v. The Council of the City of Bathurst 80 ATC 4386; (1980) 144 C.L.R. 1;
Secretary of State for Employment and Productivity v. C. Maurice & Co. Ltd. (1969) 2 A.C. 346; and
Lombardo v. F.C. of T. 79 ATC 4542; 40 F.L.R. 208 especially at ATC pp. 4545-4546; F.L.R. p. 212.
The principal authority concerning the operation of sec. 51(1) in circumstances such as the present is
F.C. of T. v. Finn (1961) 106 C.L.R. 60. There the taxpayer was a senior architect in the Public Works Department of Western Australia engaged on building design. Being entitled to six months long service leave and certain other leave he arranged to carry out plans he had previously made to visit overseas for the purpose of bringing himself up to date with overseas trends in his profession and to fit himself for future promotion in his employment. Prior to his leaving Australia it was arranged that he should extend his trip to South America and make a survey of architecture there on behalf of the Government.
ATC 4844His claim for deduction of fares and accommodation expenses was disallowed but it was later upheld by a Board of Review. The Commissioner appealed unsuccessfully to the High Court. Dixon C.J. pointed out that the taxpayer's claim was that he incurred the expenses of travelling in order the better to fit himself to perform the work which the Western Australian Government required of him. At p. 64 his Honour said:
``It will be seen that the question involved in the case is of an important description. 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.''
The Chief Justice pointed out that there was no question that all the available time of the taxpayer whilst overseas was devoted to the advancement of his knowledge of architecture and the development of his architectural equipment, outlook and skill. His Honour held that three or four conclusions could be drawn from the facts of that case ``which perhaps may be considered to govern the question whether the expenditure was incurred in gaining or producing the assessable income''. The first was 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. I should here indicate that in the present appeal the taxpayer does not rely upon any question of promotion. The second matter referred to by Dixon C.J. ``so far as motive or purpose is material'' was that the advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. Thirdly, 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 etc. 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. Finally, it was all done whilst he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service. The Chief Justice rejected the proposition that sec. 51 in either limb required a rigid restriction to the gaining or production of assessable income of the current year in which the expenditure is incurred. He concluded at pp. 68-69:
``There remains the question whether the taxpayer's expenditure upon his journey in gaining improved and up-to-date architectural knowledge is to be considered as falling within the exception of losses or outgoings of capital or of a capital, private or domestic nature. This question should be answered by a definite negative. The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, though sometimes in vain. Had he dwelt nearer to the sources of such knowledge and information he doubtless would have visited them from time to time in his career... You cannot treat an improvement of knowledge in a professional man as the equivalent of the extension of plant in a factory.''
In the same case Kitto J. came to the same conclusion and said that ``even if the relevance of the expenditure to the respondent's prospects of promotion were to be put on one side, I should consider that enough would remain in the facts of the case to entitle him to the deduction he has claimed''. After referring to the taxpayer's salary his Honour continued (at p. 69):
``It is, I think, a correct application of the terminology of sec. 51 to say that he was engaged in `gaining' that salary whenever and so long as he acted in the fulfilment of his office; for the salary payable was his remuneration for everything comprised in or incidental to his service.
The respondent incurred the expenditure during a period of leave, and in carrying out activities beyond any which had been or could lawfully have been specifically required of him by the Government. But it
ATC 4845was nevertheless in my opinion incidentally to the proper execution of his office and not otherwise that he engaged in those activities. For the office was of a kind which by its nature made incumbent upon the occupant much more than the performance of set duties at set times. Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add, in the interests of the State, even if also his own interest, to his knowledge and understanding of architectural achievements and trends overseas, both in design and in construction, and of endeavours made and being made to solve architectural problems such as might from time to time confront his Government.
In my judgment the respondent, in making the investigations and studies which he pursued during his period of leave, was acting within the scope of his office, and therefore in the gaining of his salary.''
Windeyer J., the third member of the Court, also agreed although his Honour appears to have based his conclusion on the second limb of sec. 51(1).
In the present case counsel for the respondent submitted that the taxpayer was not a person in an executive position whose views about the matters which he investigated overseas might ordinarily be regarded as of being of significance to the S.R.A.; that the first three criteria referred to by Dixon C.J. in Finn's case did not apply; that there was not any real connection between the outgoings claimed and the assessable income of the appellant (and reference was made to
F.C. of T. v. Flatchett 71 ATC 4184; (1971) 125 C.L.R. 494; that the activity associated with the expenditure was not required by the employer or recommended by him; and that minimal use of the information obtained was made by the appellant in connection with his work.
However, I am of the opinion that, notwithstanding that no question of promotion is relied upon, the case falls within sec. 51, the deductions claimed being outgoings incurred in producing the assessable income of the appellant, and they were not of a capital, private or domestic nature. In this respect I rely in particular upon the judgment of Kitto J. in Finn's case. I regard the activities of the appellant whilst overseas as being closely related to the proper carrying out of his duties as a professional engineer. Plainly he travelled abroad for the purpose of widening his knowledge and making himself familiar at first hand with the developments in overseas railway electrical systems. In doing so he better equipped himself to carry on as a professional engineer employed by the State Rail Authority. In order to keep up and advance his status and standing as a professional electrical engineer he was obliged to keep abreast of developments in railway electrical engineering, whether at home or overseas. His visit was designed to ensure, as best he could, that he brought the highest degree of professional skill to the carrying out of his task. In
Magna Alloys and Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4559 Deane and Fisher JJ. used words in relation to the second limb of sec. 51(1) which are equally applicable, in my view, to the first limb. Their Honours said:
``It is implicit in what has been said that the distinction between immediate direct purpose or object and remote indirect purpose or object does not play an essential part in determining whether an outgoing is properly deductible pursuant to the second limb of sec. 51(1) of the Act. To the extent that the subjective element is relevant, what is important in the case of a voluntary outgoing is the identification of the advantage or advantages which the outgoing was intended to achieve on behalf of the taxpayer regardless of whether that advantage or those advantages were seen as the direct result of the outgoing or as indirectly flowing therefrom or of whether the pursuit of them should be seen as `purpose' or as `object' or as `motive'. Business outgoings may be properly and necessarily incurred in the pursuit of indirect and remote, as well as direct and immediate, advantages. The fact that the business advantage sought is indirect or remote will not of itself preclude the pursuit of that advantage from characterizing the outgoing as an outgoing necessarily incurred in carrying on the relevant business.''
ATC 4846express request by his employer to travel overseas on its behalf or to improve his understanding of overseas developments does not, I think, preclude the appellant from satisfying the relevant test. As Kitto J. observed in Finn's case his professional status implied an obligation of progressive acquaintance with a living and developing body of knowledge, and it was plainly incidental to his employment as a professional engineer that he should avail himself of such opportunities as might arise to add, in the interests of his employer, even if also in his own interests, to his knowledge and understanding of matters such as those which the appellant investigated overseas, this all being work which from time to time he could use to advantage in the practice of his profession in the employment of the S.R.A. In these circumstances I consider that the appeal should be allowed. I remit the assessment to the respondent to be amended in accordance with my judgment. I order the respondent to pay the costs of the appellant.