Evans v. Federal Commissioner of Taxation.

Connolly J

Supreme Court of Queensland

Judgment date: Judgment handed down 26 November 1986.

Connolly J.

The appellant's return of income for the year ended 30 June 1984 contained a claim for a rebate of $250 as self-education expenses, being part of the cost of his thesis for the degree of Doctor of Philosophy in the University of Queensland, the subject being ``The Finnish Peace Treaty of 1947''.

As expenditure incurred in earning his assessable income, he also included, amongst other things, the balance of the costs of the preparation of this thesis over and above the $250 rebate, in the sum of $4,990. The rebate was allowed but the latter sum was disallowed and on 21 June 1985 his accountants lodged an objection against the disallowance. The grounds of the objection are sufficiently stated in the following paragraphs from the accountants' letter:

``The taxpayer expects to obtain his Ph.D. by December 1985. The Ph.D. qualification is to requisite for the taxpayer to be able to obtain a University Teaching position, and they are totally related to earning of income, and not for a non related course of study, which will result in a substantial increase in his earning capacity in his present position as a teacher.

The taxpayer will also be able to supplement his income after obtaining the Ph.D., from royalty income from Finnish and Swedish Producers from book sales. The taxpayer will also be able to obtain income from research because of the additional qualification.

The expenses were necessarily incurred to expand existing qualifications, to increase the taxpayer's earning capacity from his existing occupation. A letter is to be obtained from Dr John Moses, Reader in History, University of Qld, and will be forwarded later. This letter will endorse the fact that a Ph.D. qualification is vital for the taxpayer's professional and financial advancement.''

It is the fact that the appellant did considerable research for his Ph.D. from 1980 to 1983 in the United States, Finland, the United Kingdom, Norway and West Germany.

On 20 November 1985, the objection was disallowed and the appellant requested that it be treated as an appeal to this Court.

The appellant has an impressive academic record. He graduated B.Sc. from the United States Naval Academy in 1948 and took a master's degree in the University of Queensland in history in 1977. He has taught extensively in the United States and in the States of New South Wales, Victoria and Queensland. His publication list is extensive and I accept that he is well known in areas of history research. He was accepted by the University of Queensland as a candidate for the Ph.D. degree on 1 June 1977. He has held the appointment of head of the department of history in a number of schools. He presently has the highest classification which can be held for teaching in the school system. It follows that if his Ph.D. degree is awarded, it can have no effect upon his salary entitlement pursuant to any relevant award. As the grounds of objection clearly reveal, his object in taking this higher degree, so far as earning capacity is concerned, is to obtain an appointment on the teaching staff of a university. In the year ended 30 June 1984, the appellant worked part of the year in a field altogether outside education and from 23 January to 30 June he was employed by the Catholic Education Office as a teacher. It is not suggested that his degree would advance him in any way in employment with that organisation.

ATC 4903

If this appeal is to succeed, the appellant must demonstrate that the sum of $4,990 represents outgoings incurred ``in producing the assessable income''. That is to say he must bring himself within the first limb of sec. 51(1) of the Income Tax Assessment Act for I do not think it can be suggested that he was involved in carrying on a business within the meaning of the second limb.

At first glance it might be thought that the expression ``the assessable income'' must refer to the income of the year of tax. However, the course of judicial decision is to the contrary. Thus in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68 Dixon C.J., after referring to the argument that the presence of the definite article meant that one looks only at an intent or purpose of gaining or producing the assessable income of a current year, continued:

``It may be remarked that the argument based on the word `the' cannot be regarded as unaffected by the use of the word `in'. For it is impossible to suppose that an expenditure directed to gaining future income cannot be allowed as a deduction unless its productive effect within the current year is seen or expected. If, therefore, the word `the' actually was read as limiting the expression that follows to assessable income of the current year, the consequence must surely be that the word `in' is to be read as importing no element whatever of purpose or motive and meaning no more than `in the course of' in a very general sense. The better view, however, is that s. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year.''

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

``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 or 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.''

A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1975) 132 C.L.R. 175, Mason J. at ATC p. 4071; C.L.R. p. 197 observed:

``Looking at the question de novo the case for saying that `the assessable income' in sec. 51(1) means assessable income of the taxpayer generally without regard to division into accounting period is to my mind irresistible. There is every reason for thinking that the definite article was used so as to designate the income of the taxpayer generally rather than the income of the taxpayer in the year in question. It is inconceivable that Parliament intended to confine deductions to losses and outgoings incurred in connection with the production of income in the year in question and to exclude losses and outgoings incurred in connection with the production of income in preceding or succeeding years. True it is that the expression `in gaining or producing' as it applies to assessable income may allow some expansion in the relationship which it would otherwise prescribe between the loss or outgoing and the production of income in the year in which the loss or outgoing was incurred, but the expanded relationship thereby suggested is hinged upon the notion that the taxpayer is conducting a continuing business, a concept which finds no expression in the first limb of sec. 51(1) for the ascertainment of the allowance of a deduction. The preferable course, so it seems to me, is to read the reference to assessable income in the first limb of sec. 51(1) as a reference to the assessable income of the taxpayer generally.''

Accepting as I do that a deduction may be allowable under sec. 51(1) although the income to which it is intended to lead may not be expected to be derived until a later year of tax, the appellant is nevertheless faced with the difficulty that the section requires that the outgoings be incurred not merely with a view to the obtaining of income in the future, but ``in gaining or producing'' assessable income. In
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 349 the Court said:

ATC 4904

``The words `incurred in gaining or producing the assessable income' mean, as has been stated many times, `in the course of gaining or producing the assessable income':
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 56 C.L.R. 290;
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, at p. 57.''

The income which the appellant in this case hopes to derive as the result of his Ph.D. qualification is the salary of a teacher of history in a university. It is difficult indeed to see how the outgoings he has incurred in the production of his thesis can be said to have been incurred in the course of gaining or producing such income for he has, to date, never held such an appointment.

Finn's case (supra) was that of an employed architect in the Public Service who used a period of leave to improve his architectural knowledge by travelling and studying abroad. Dixon C.J. identified four features, the combination of which made it possible to describe the cost of his study trip as outgoings incurred in gaining his assessable income. These were that his increased knowledge made his advancement in the Service more certain; that such advancement was a substantial motive for his undertaking study travel; that his superiors in the Service regarded his travel as an advantage in his employment; and finally, the fact that the activity occurred while he was in employment and acting in accordance with the conditions of his service. It is this last factor which is absent in the appellant's case. It was obviously critical for Kitto J. who put it in the forefront of his judgment. His Honour observed that the taxpayer's assessable income consisted of, or included, a salary which was payable from time to time in virtue of his holding the office of a senior design architect in the Public Works Department of Western Australia. 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.''

Elsewhere his Honour observed that it was incidentally to the proper execution of his office and not otherwise that he engaged in the activities which involve the outgoings. Windeyer J. at p. 70 said:

``Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling.''

It is true that this is a more general statement but even so, it postulates the carrying on of the professional calling when the outgoings are incurred. This was the situation in
F.C. of T. v. Wilkinson 83 ATC 4295; (1983) 2 Qd.R. 301 decided by G.N. Williams J.

In the course of argument, I was referred to
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494, a decision of Menzies J. sitting as a single justice. The case involved two types of outgoing. Costs associated with the gaining of a Teacher's Higher Certificate were allowed as deductions on the footing that the effect of such a certificate was to increase the salary payable to the teacher in the employment in which he was engaged when he incurred the outgoings. On the other hand, costs associated with university studies were disallowed, the learned Judge saying that he was not able to find any connection between the payment of the fees and the assessable income of the taxpayer ``beyond the circumstance, which I take to be self-evident, that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department. 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'' (ATC p. 4187, C.L.R. p. 499). It is true that in Hatchett's case the taxpayer would seem to have been at best a mediocre student. It was said that any relationship between any assessable income of the taxpayer and the payment of university fees was problematical and remote and that his lack of success made it impossible to find affirmatively that there existed any connection between the payment of the university fees and the earning of the assessable income.

With all respect, it does not seem to me that the success which attends the outgoing is

ATC 4905

relevant. A retailer's decision to market a new line of stock may prove to be disastrous, but the costs of the stock will nonetheless be an outgoing incurred in gaining the assessable income. The difficulty which faces the appellant, as I have said, lies in demonstrating that the cost of preparing his thesis was incurred in gaining his assessable income. One could only reach this position by saying that assessable income in his case is income derived and to be derived from the teaching profession in its widest sense; and that the outgoings were incurred while he was on one rung of the ladder with a view to his moving up a rung or so.

In my judgment, however, the correct approach, as reflected in Finn's case, is to identify the income-earning activity of the taxpayer and then determine whether the outgoings were incurred in the course of that activity. It follows that in my judgment the appeal must fail.

The appellant appeared for himself and it is obvious to me that the result will seem quite unjust to him. His efforts have, in fact, been more admirable than those of many who have succeeded in what he must regard as a similar situation.

The Income Tax Assessment Act is, of course, primarily a means of raising revenue by the taxation of income but two qualifications of this general statement must be made. First, because the burden of income tax is so heavy, the Parliament is able to encourage the flow of private funds to what are perceived to be socially desirable activities by allowing tax concessions in specific areas. Second, the burden is so unendurable for certain sections of society, that the Parliament has been constrained to make some concessions to them. There is, however, no discernible pattern in all this, so that, because it reveals no consistent social policy, the legislation is at best a wilderness of single instances. One thing, however, is certain. All socially desirable objects are not tax deductible and all objects which are tax deductible are not necessarily socially desirable. In historical terms, those who make the taxation laws have responded over 50 years or so to pressures for the mitigation of their impact and this response has been haphazard, partial and usually by way of uneasy compromise.

The appellant pointed with some scorn to a case in which the cost of transacting the business of a professor of law by way of entertainment on licensed premises was allowed. He was, not unnaturally, disposed to suggest that his own case was far more meritorious. He may indeed be correct in this, but from what I have already said about this legislation, it is obvious that only by accident could the type of system with which we are here concerned have any moral content. Indeed, at present Australia is seeing tax imposed on one group of the society by reason of its provision of benefits for another group, frequently under the compulsion of the law. I mention all this only to show that one simply cannot infer from the fact that in one situation the cost of self-education is deductible, that the Parliament is likely to have intended it to be deductible in another. The appellant must resign himself to the fact that he is living in an imperfect world.

I should mention that the appellant also sought to justify the deduction on the basis that he proposed to derive assessable income by sale of his thesis in Finland. However, he had no answer to the argument that any income from such a source would be exempt income, being taxed at the source, and so would therefore not attract deductions under sec. 51.

I have said that the appellant appeared for himself. He was commendably brief in the presentation of his case and his venture into the jungle of the Income Tax Assessment Act has cost society very little. I do not feel constrained to impose an order for costs upon him.

The appeal must be dismissed, but without costs.

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.