PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
These applications relate to the years of income ended 30 June 1982 and 1983. They are the applications of a taxpayer who was at all material times a solicitor. Following his admission as a solicitor of the Supreme Court of N.S.W. he secured employment with a firm of Sydney solicitors. (I shall refer to the firm as "Proctors".) While working with Proctors he secured a part-time appointment as a lecturer in the law school of a university. I find that he was well regarded and that by mid-1982 his salary with Proctors was of the order of $28,000 per annum. From an earlier date he had appreciated the desirability of advancing his studies with an overseas university. He had in view the prospect of increasing his formal qualifications by taking a Master's degree and, at the same time, expanding his learning and his professional skills.
2. As a result of enquiries he made in the United States of America, he was offered a position in the LL.M. program of a highly-regarded university and he decided to accept it. Having made that decision, he conferred with the partner in Proctors to whom he was principally responsible with the result that that partner wrote to the "staff partner" in the following terms:
"This morning I spoke with (... ). He told me that he had an opportunity to do a Masters Degree at... University,... He had been agonizing over this decision and last week came to the conclusion that he would accept the position. He anticipates leaving the firm on 01 September 1982 and will finish his course in May 1983. He said he had no plans after May 1983, but said that he hoped that he could return to us. I believe that he regards the prospect of returning as a real option, no doubt to be considered with such other options that he may have available to him at the end of his Masters Degree."
On 3 July 1982 the staff partner replied:
"I spoke with the executive about (... ) proposal to go to... University. We would be happy to re-employ him upon his return in May 1983. I think we would be happy to assist him in some way if he is to return to us in May. Could I please discuss with you. I apologise for the formality of this note which I am dictating out of hours."
The assistance spoken of in the memorandum was practical. It came to the applicant when he left Proctors as $A1,200, which was returned as a "retiring allowance" taxable as to 5%.
3. I am satisfied that prior to 30 June 1982 the applicant had expended $970, made up as follows:
$ Air ticket ......................... 861 Application fees (United States universities) ........ 92 Transcript fees - A.N.U. ............ 6 Application fees (International House, New York) ... 12 ---- Total (rounded down by the applicant) .................... $970 ----
4. In August 1982 the applicant terminated his employment with both Proctors and the university, but in each case with an expectation on his part that he would be able to resume employment upon his return from overseas. That expectation was based upon assurances that he would be welcome to renew those engagements. At the same time, it is quite clear - and the applicant did not suggest otherwise and, indeed, by his evidence confirmed it - that he assumed no obligation to resume either engagement and that neither Proctors nor the university committed themselves to re-engage him.
5. Having travelled to the United States, he carried out the Masters program and was successful. Whilst studying there he resided at
ATC 1068a residential college associated with the university. While overseas he investigated the possibility of taking up other employment and he was aware that a position might be available to him with a firm of solicitors in Hong Kong. Then in February 1983 he wrote to the partner under whose direction he had worked at Proctors, saying:
"As you know my Masters course finishes in early May, and I intend to return to Sydney shortly prior to the beginning of June.
I am interested in returning to practice at (Proctors) and would be pleased if you would confirm, at your convenience, the availability of a position.
My present position is reminiscent of that of Sir Patrick Hastings upon his return from the Boer War in 1902 who, when asked why he was pawning a campaign medal, replied: `it is not that I have insufficient funds, it is that I have no funds at all'.
Please convey my regards to all at (Proctors)."
From his point of view the reply was no doubt as acceptable as it was succinct. It simply said:
"Thank you for your letter of 23 February 1983. Confirmed!"
When he returned to Australia he immediately resumed employment with Proctors. No position was available at the university. He remained in the service of Proctors until 1984 when he again resigned to take up employment with a firm of solicitors in Hong Kong. He remained there for some 14 months. Following that appointment he returned to Australia and since that time has carried on the practice of the law on his own account.
6. In the year of income ended 30 June 1983 I am satisfied that he incurred expenses in and about his course of study and living and incidental expenses while undertaking it, as follows:
$ University fees 8,860 Printed materials, copying and case books 174 University accommodation 1,646 Meals, living expenses and sundries 4,095 ------- $14,775 -------
In so far as documents were produced in support of the claim, they were calculated in $US, but no challenge was made to the accuracy of the claims on that account. There was some evidence from the applicant to suggest that between August 1982 and August 1983 the $US equivalent of the $A fell from $1.14 to 97 cents. In all the circumstances, I am content that, as to quantum, the claim has been made out.
7. The applicant, who appeared for himself, claimed that all of the expenses incurred constitute "losses and outgoings... incurred in the gaining or producing (his) assessable income..." and, as such, are allowable deductions pursuant to sec. 51(1) of the Income Tax Assessment Act 1936 ("the Act") notwithstanding the requirement of that section that the expenses should not be "losses or outgoings of capital, or of a capital, private or domestic nature..." In particular, the applicant rests his claim on the authority of the decisions of the Full Bench of the High Court of Australia in
F.C. of T. v. Finn (1961) 106 C.L.R. 60; of
F.C. of T. v. Hatchett in the High Court in 71 ATC 4184; and of Waddell J. in the Supreme Court of N.S.W. in
F.C. of T. v. Kropp 76 ATC 4406.
8. The Commissioner's representative argues for a contrary conclusion. In doing so he contends that, as to the sums of $1,646 (accommodation) and $4,095 (living expenses), they are expenses which are private in character and not allowable; and further, that by force of sec. 82A, any amount which might otherwise be allowable has to be reduced by $250: a sum for self-education expenses which is only allowable by way of rebate.
9. The applicant, in presenting his case, points to the decision of Waddell J. in Kropp as being directly in point; and also to the decision of this Tribunal in Case T78,
86 ATC 1094. At the date of hearing the applicant could not have been aware of a further decision of this Tribunal which has come to my attention since the hearing. That was Decision No. 3734 of Dr Gerber (Senior Member), delivered 3 August 1987 [reported as Case U166,
87 ATC 957]: a
ATC 1069decision which in broad terms considered similar issues but resulted in a determination in favour of the Commissioner.
10. The Income Tax Assessment Act 1936 ("the Act") provides for the determination year by year of the taxable income of a taxpayer (sec. 17);
"In calculating the taxable income of a taxpayer, the total assessable income derived by him during the year of income shall be taken as a basis, and from it there shall be deducted all allowable deductions."
It follows that the events giving rise to the determination of taxable income must be events which occur within "the year of income". What actually occurs in later years may need to be taken into account in determining credibility or in determining whether expectations alleged to exist during the year of income did exist. But liability to income tax in relation to any particular year of income is ordinarily dependent on the events and transactions of that year. (Exceptions can arise by force of special statutory provisions. Disallowance of investment allowance deductions by reason of happenings after the close of the year of income provide an example.) For example, the harvesting and sale of a crop in one year of income, may provide cogent evidence that the crop was planted in an earlier year with a view to sale; and sale of the crop so harvested at a profit may provide cogent evidence that the planting was undertaken with a view to sale at a profit. But a failure to profit because of market conditions, or even a failure altogether to sell because of crop failure, does not of itself establish that the planting was not undertaken with a view to sale at a profit. Applied to the circumstances of the present applicant, that means that the claim will not be allowable because he returned to the service of Proctors in a later year. Nor would it have been not allowable only because he did not return to their service.
Secondly, it is the clear view of the High Court of Australia that, in so far as sec. 51(1) of the Act provides that:
"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...,"
it is clearly to be understood as requiring that the expenses so incurred be incurred "in the course of" gaining or producing such income (
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295). However, it is not necessary that the income so referred to be derived in the same year as that in which the expense is incurred (
The Herald & Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113). But the requirement that the expenditure be incurred "in the course of" gaining the assessable income does result in situations in which expenditure incurred prior to the derivation of income may not be allowable because it comes at a point too soon in time (
F.C. of T. v. Maddalena 71 ATC 4161), just as other expenses may not be allowable because the income-producing activity to which they are alleged to relate has ceased so as to deny the existence of any required nexus between the loss or outgoing on the one hand and income on the other (
Inglis v. F.C. of T. 80 ATC 4001).
Thirdly, in my view nothing turns on the circumstance that the expenses related to travel overseas and to study abroad. The same principles would be applicable if the applicant had ceased employment to study full-time in Melbourne.
11. With those considerations in mind, it is appropriate to say that I find:
- (a) that, in so far as expenses were incurred in the months of July and August 1982 prior to departure for the United States of America, they were not incurred "in the course of" deriving any of the income derived or in the course of being derived during that period, either as an employed solicitor with Proctors or as a lecturer on the part-time staff of the university;
- (b) that, in so far as the remainder of the expenses were incurred, liability to meet those expenses did not arise out of any income-earning activity being undertaken during the period the expenses were incurred; but
- (c) that all of the expenses in dispute were incurred with a view to the future generation of income to arise from future income-earning activities and, more particularly, with the expectation that the
ATC 1070future income levels of the applicant would be greater than would have been the case had he not incurred the expenses, and that the increment would be more than sufficient to make up for the expenses so incurred and the income lost to him during his period of further study; but
- (d) that the expenses in dispute were not directly or indirectly expenses of earning the income he was to come to later receive as an employee of Proctors when he came to be again employed by them following his return from overseas following arrangements made shortly before his return. They were not expenses incurred "in the course of" earning that future income or of earning the income he was later to receive from a firm of solicitors in Hong Kong when working for them as a solicitor, or of practising law on his own account as he was to do from August 1985 and has continued to do since that date.
12. If the test was that expenses should be allowed if they were directed to the future derivation of income, the claim might be allowed. But that is not the test. Authority requires that there be a sufficient nexus between the expenditure in question and the assessable income of this taxpayer to satisfy the requirement of the "first limb" of that section that the expenditure should arise "in the course of" deriving the assessable income. It also requires that the expenditure should not be of a capital, private or domestic nature.
The required nexus between the expenditure by the taxpayer and his assessable income may be demonstrated by establishing that an increased level of assessable income was a direct and immediate consequence of incurring the expenditure (as with one head of claim in F.C. of T. v. Hatchett 71 ATC 4184); or that an increased level of assessable income so closely followed the expenditure as to be perceived to be a consequence of it (as in
F.C. of T. v. Wilkinson 83 ATC 4295); yet success in obtaining an increased level of remuneration hoped for is not essential (cf. Finn (1961) 106 C.L.R. 60).
The required nexus may be established by the circumstances of the employment, in that either the nature of the employment may itself establish the nexus (cf. the views of Kitto J. and Windeyer J. in F.C. of T. v. Finn (ante)); or the requirements of the employer may establish it (as in
F.C. of T. v. Collings 76 ATC 4254).
It is not alone enough that the expenditure is a prerequisite to the earning of assessable income because the expenditure may still be characterised as being of a private nature (as in
Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478 and
Lodge v. F.C. of T. 72 ATC 4174) or that it thereby renders him better qualified to discharge the duties of his employment (cf. the second head of claim in F.C. of T. v. Hatchett 71 ATC 4184 at p. 4187; and
F.C. of T. v. White 75 ATC 4018).
Just as it is not essential that the taxpayer should succeed in obtaining the increased level of assessable income hoped for as a consequence of the outlay, so too I am of the view that it is not essential that there should even be a prospect of an increased level of assessable income.
13. Were it not for the decision in Kropp and the decision of my colleague, Mr Beddoe (Senior Member) in Case T78, I would have thought that sufficient to establish that the determination of the Commissioner upon the objection ought to be upheld, a result which would accord with the decision of my colleague Dr Gerber (Senior Member) [Case U166].
14. In Kropp the facts were adequately set out in the headnote which reads (at p. 4406):
"The taxpayer, a chartered accountant, resigned his employment with an Australian firm of accountants (Price Waterhouse) and went to work in Canada for two years with an affiliated but autonomous firm. He was then re-employed by the Australian firm with a promotion and an increase in salary.
The evidence showed that the taxpayer intended to make his career in accountancy with the Australian firm, and that the major purpose of going to Canada was `to gain additional experience and to keep abreast of current developments in the audit sphere'. The Australian firm pursued a policy of encouraging its staff to travel overseas at their own expense."
After acknowledging that "each case, must, of course depend upon its own particular circumstances", his Honour allowed the claim.
Dr Gerber, in [Case U166], said of that decision [at p. 959]:
"The decision is readily explicable, either on the basis that a resignation undertaken in circumstances where the resigner could anticipate `with considerable confidence' being re-employed by the same employer at an increased salary is not really a `resignation' strictu sensu, or on the more theological approach that Price Waterhouse & Co, wheresoever situate, is one and indivisible."
For my own part I do not share the view of Dr Gerber that the decision is "readily explicable". In reaching the conclusion he did in Kropp, his Honour acknowledged the decisions in Lunney, Maddalena and Hatchett which I have previously referred to. His Honour then went on to cite the decision of the High Court of Australia in Finn saying (at p. 4410):
"I think that it may be concluded from the differing reasons given by the Members of the Court in F.C. of T. v. Finn (1961) 106 C.L.R. 60, that where a taxpayer incurs expense in maintaining or improving his qualifications in a way which is of distinct advantage to his work in the eyes of his employer (p. 67), or pursuant to an implied obligation of progressive acquaintance with a living and developing art (p. 69), the expenditure is incurred in gaining the assessable income. A similar conclusion was deduced by Helsham J. in F.C. of T. v. White 75 ATC 4018 from Finn's case and Hatchett's case when he said that `expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under sec. 51 when it can be said that those studies are part and parcel of the employment, which means that the expenditure is incurred in the process of carrying out the employee's duties'."
Those comments, with which I respectfully agree, all relate to the circumstances of persons in employment. They point to the existence of a sufficient nexus between expenses occasioned by learning experiences and the assessable income generated by the employment in which the taxpayer is engaged and to which the learning experience relates. But that was not the situation for Kropp and is not the situation in which this applicant was placed. Both had terminated their employments. Neither considered himself bound to return to the service of his former employer. Neither considered that the former employer was bound to re-engage the taxpayer at his request. Both foresaw future re-employment with the former employer as a distinct possibility. All of those considerations were matters of historical fact, already matters of history at the close of the years of income in question. The circumstance that, in both cases, the expectation of re-employment came to be realised in time was a matter for the future. At the critically important dates and for reasons already expressed, it cannot be determinative of entitlement. I regret that I do not share his Honour's view that the existence of a "perceivable connection" between the outgoing and a future source of assessable income is sufficient to satisfy the requirements of sec. 51 of the Act.
In Case T78, 86 ATC 1094 the applicant was a law clerk who had been employed with a firm of solicitors. Following university graduation he had been admitted to practise as a barrister but had not qualified to practise as a solicitor. In September 1981, before he had commenced practice as a barrister, he left his employment with the firm of solicitors and travelled overseas to undertake further studies. Upon his return, he commenced practice as a barrister although prior to his departure he had been equivocal as to whether upon his return to Australia he would work with his employer solicitors. The Tribunal found that, because he had been admitted to practise as a barrister before he went overseas, that was sufficient to entitle him to a deduction for most of the expenses claimed. The Tribunal made the point (at p. 1099) that:
"32. If, however, the applicant had undertaken the degree course at Cambridge to enable him to practise as a solicitor or, say, to get a lectureship at a university, then the case would be different."
In large measure the claim was allowed.
15. In [Case U166] the applicant was an airline pilot who, at the age of 48 years, accepted an attractive retirement package from his employers and resigned. Thereon he became unemployed but, in order to be able to derive income in future from commercial flying, he enrolled in a flying course offered in the United States which would give him additional endorsements. Having successfully completed the course, he returned to Australia
ATC 1072and thereafter engaged sporadically in some corporate contract flying. The Tribunal was pressed to allow the claim on the authority of the decisions in Kropp and Case T78, but declined to do so. Although having described the decision in Kropp as "readily explicable" (cf. the passage quoted), Dr Gerber then proceeded [at p. 959]:
"Neither view is relevant to the facts now before me. Again, Case T78, like Kropp, is a `one off' decision which depends on its own peculiar facts."
16. For my part, I regret that, with full respect to his Honour and my colleague Mr Beddoe, I disagree in principle. As to Kropp, for reasons I have stated, I find that the decision is inconsistent with the authorities I have cited earlier in these reasons, and accordingly, I decline to follow it. As to Case T78, in my view, on the evidence disclosed in the reasons for decision, the applicant was not carrying on practice as a barrister and thereby generating any entitlement to assessable income at the time he was undertaking his studies at Cambridge. His circumstances were more akin to those of the applicant in a decision not released for publication (No. 3763, 11 September 1987). In that case the applicant was a barrister who, having been in practice, suffered the experience of having his name removed from the Roll of Barristers by order of his Supreme Court. After some years he successfully applied for his name to be restored to the Roll and, having been successful in that application, he immediately recommenced practice as a barrister. He contended that he had at all times had the status of a barrister; that he had only ever once been admitted as a barrister of his Court; and he claimed that, for those reasons, the expenses of procuring the right to resume his practice were expenses incurred in and about the carrying on of that practice. I disagreed. I held that the expenses claimed were not incurred in the course of deriving his assessable income as a barrister. In the circumstances, I decline to follow the decision in Case T78.
17. In my view, the answer in the present matter is clear. The expenses were not incurred in circumstances satisfying the positive requirements of sec. 51. Having so found, it is not necessary to consider the alternative arguments for the Commissioner. The determinations of the Commissioner upon the objections are to be upheld.