JAYATILAKE v FC of TJudges:
Full Federal Court
Sweeney, Jenkinson and Hill JJ
This is an appeal from the judgment of a single Judge of the Court [reported at 90 ATC 4776], dismissing an appeal from a decision of the Administrative Appeals Tribunal by which it affirmed four decisions of the Commissioner of Taxation (``the Commissioner'') disallowing objections by the respondent (``the taxpayer'') in respect of the disallowance of certain claims made under s. 51(1) of the Income Tax Assessment Act (``the Act'') for deductions for child minding expenses incurred in the 1982, 1983, 1984 and 1985 years of income.
As his Honour observed, there was no dispute about the facts and we adopt his statement of them and of the course of the proceedings, as follows [at pp. 4776-4778]:
``The taxpayer, a qualified accountant, was a permanent officer of the Australian Public Service. During the time of her employment, she studied, on a part-time basis, for the degree of Bachelor of Computer Science at a tertiary institution. For this purpose, she was given study leave of eight hours per week. In 1979, being pregnant, she took maternity leave, but returned to work after the child, a son, was born in November of that year. She continued with her part-time study. In order to continue her studies, it was necessary for the taxpayer to arrange for her son to be minded. Initially the taxpayer's mother did this but during the 1982 taxation year her mother left Australia. In that year the son was placed in a day nursery. In the 1984 taxation year the taxpayer graduated as a Bachelor of Computer Science.
In the 1984 taxation year the taxpayer undertook part-time study for the degree of Master of Business Administration. For this purpose she was granted similar leave. Again, her son was placed in a day nursery. She completed this degree in 1988.
In each of the taxation years between 1982 and 1985, the taxpayer devoted at least 60% of her weekday time, between leaving home in the morning and returning at night, to her studies. Over this period the taxpayer was promoted to several higher positions. In 1982 the taxpayer held the position of a computer systems officer, grade 2. In 1983 she was promoted to acting computer systems officer, grade 3; in 1984 she was appointed a permanent computer systems officer, grade 3; in 1985 she was appointed to a position with the Victorian Government and in 1986 she was promoted to computer systems officer, grade 4; in 1987 she was promoted to computer systems officer, grade 5 and in 1988 to a management position, also in the Victorian Public Service. The taxpayer's duties initially related to EDP systems, but, as she was promoted, her responsibilities related more to management. The Tribunal found her motive in undertaking her studies was to achieve advancement in her employment and that those studies were instrumental in her obtaining the promotions which she did achieve, both during the years in respect of which the deductions were claimed, and subsequently.
The deductions claimed
In each relevant year the applicant claimed self-education expenses under sec. 159U of
ATC 4518the Act up to the maximum $250 rebate. Amounts of self-education expenses in excess of that figure were in each year claimed as a deduction under sec. 51(1) of the Act, listed under a heading `Excess of Self-Education Expenses'. The fees paid to the day nursery were in each case claimed separately as `child-minding costs' (or, in 1984 `day nursery charges') and not under the heading `Excess of Self-Education Expenses'. The amounts in question were in 1982, $1,224; in 1983, $1,212; in 1984, $1,114; and in 1985, $1,160. The need to apportion the fees between time spent in employment and time spent on study was not raised at the Tribunal hearing.
In respect of each of the 1982, 1983 and 1984 taxation years, the amount of excess self-education expenses claimed under sec. 51(1) of the Act was initially disallowed but was later allowed. The expenses included amounts for fees paid to institutions, books, stationery, photocopying, fares, depreciation and repairs on personal computer, and a proportion of lighting, heating and telephone expenses. In respect of the 1985 year, those expenses were allowed. A claim for kindergarten fees as an education expense was claimed under sec. 159T in respect of the 1983 taxation year. That amount was disallowed, was the subject of an objection and was before the Tribunal. However, counsel for the taxpayer indicated to the Tribunal that no submissions would be made in support of that objection. Accordingly that objection decision was affirmed by the Tribunal.
The case presented by the taxpayer to the Tribunal
Counsel for the taxpayer submitted to the Tribunal that the fees paid to the day nursery were self-education expenses, and accordingly were related to the earning of assessable income; that they were not of a private or domestic nature, and that they were deductible under sec. 51(1). Reliance was placed upon the reasoning of Dixon C.J. in
F.C. of T. v. Finn (1961) 12 A.T.D. 348 at pp. 350-351; (1961) 106 C.L.R. 60 at p. 67. Counsel for the taxpayer submitted, and the Tribunal accepted, `that mutatis mutandis the circumstances of Mr Finn's expenditure on travel corresponded to the circumstances of the [taxpayer's] expenditure on self-education. Whether or not the expenditure on child care can be similarly regarded is the matter which is before me'.
The reasoning of the Tribunal
The Tribunal said that the question whether child care expenses can be deductible under sec. 51(1) had been considered in
Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171;
Martin v. F.C. of T. 84 ATC 4513; (1984) 2 F.C.R. 260 and
Hyde v. F.C. of T. 88 ATC 4748. The Tribunal said that in each of those cases, the claim for deductibility of the cost of child care which was necessary to enable the applicant to undertake work which produced assessable income had failed. The Tribunal noted that counsel for the taxpayer was not concerned to challenge the principles established in those cases. Rather, her client's claim was for the deductibility of the day nursery fees as self-education expenses.
The Tribunal, having analysed the three authorities mentioned, accepted the submission put on behalf of the Commissioner that `this matter must be determined on the basis of the proper characterisation of the expense in question and that it is properly characterised as an expense which enabled the (taxpayer) to engage in study, the expenses of which study have been found to be incurred in gaining or producing assessable income. The expense itself was not so incurred'. Having reached that conclusion, it was not necessary for the Tribunal to consider the question of the private or domestic nature of the expense for the purposes of the exception in sec. 51. Accordingly, the objection decisions under review were affirmed.
The submissions put on the appeal on behalf of the taxpayer
In support of the appeal, senior counsel for the taxpayer summarised (and counsel for the Commissioner accepted the summary) the relevant facts as follows:
- (1) the degrees of Master of Business Administration and Bachelor of Computer Science related directly to the job the taxpayer was doing, or was to do;
- (2) the taxpayer's employer accepted that her study was of real importance to her job;
- (3) the taxpayer's own motive in undertaking study was to achieve promotion and a higher salary;
- (4) her studies were instrumental in her advancement in employment, i.e. in obtaining the promotion she wanted;
- (5) her employer encouraged her to study;
- (6) her employer sponsored her study by allowing her time to undertake it;
- (7) without the child-minding the taxpayer could not have undertaken the courses.
On behalf of the taxpayer, it is said that the Tribunal erred in law in accepting that the principles stated in Lodge's case, Martin's case and Hyde's case, involving as they did the `proper characterisation' of the expenditure in the terms stated by the Tribunal, were applicable here. It is submitted that the Tribunal should, instead, have applied the reasoning of Dixon C.J. in Finn's case to the effect that a process of self-education can provide a relevant link between expenditure and the earning of income. The taxpayer contends that it is not enough to say that the claim for a deduction must fail merely because the expenditure was an `essential prerequisite' to the derivation of income (cf. Lodge's case, per Mason J. at ATC p. 4176; C.L.R. pp. 175-176).''
The learned trial Judge expressed his conclusion as follows [at pp. 4778-4779]:
``I cannot accept this analysis. It is now settled that, for expenditure to form an allowable deduction under sec. 51(1), the essential character of the expenditure must be incidental and relevant to the activities by which the taxpayer gains or produces assessable income; and that an expense is not incidental and relevant to the derivation of income merely because it was incurred for the purpose of earning assessable income and it was an essential prerequisite of the derivation of the income. In my opinion, the essential character of the claimed expenditure, incurred for the care and nursing of her child, was neither incidental nor relevant to the taxpayer's activities as a computer systems officer. Although the child-minding services were provided at the request of the taxpayer, those services were provided to the child and not to the taxpayer. This is distinct from the situation in Finn's case where the services in question, such as transport and accommodation, were provided to the taxpayer himself as part of the process of his self-education. The present expenditure might be relevant to the education of the child, but it is not relevant to the education of the taxpayer, and thus her earning of income, in the sense explained by the authorities. In my view, as counsel for the Commissioner submitted, the fact that the claimed expenditure was necessary to enable the taxpayer to further her study and was incurred by her for that purpose did not render it any more incidental or relevant to her activities as a computer systems officer than if the expenditure had been necessary to enable her to continue in her employment.''
His Honour then turned to deal with an objection to competency:
``On behalf of the Commissioner, it is submitted that the appeal is incompetent. It is said the Court lacks jurisdiction under sec. 44(1) of the Administrative Appeals Tribunal Act 1975 because the decision appealed from `arises exclusively out of the application of the correct principles of law to the facts' (see
F.C. of T. v. Brixius 87 ATC 4963 at p. 4969; (1987) 16 F.C.R. 359 at pp. 366-367). See also the discussion by French J. in
F.C. of T. v. Swift & Ors (1989) 89 ATC 5101 at pp. 5112-5114.
I have difficulty in accepting the Commissioner's contention. In the present case, there is not, and never was, any dispute as to the facts, either primary or secondary. It was not said, as was the position in Brixius' case, that the question for decision was one of `fact and degree' (see 16 F.C.R. at p. 367). The question raised by the taxpayer here was purely one of law. She accepted the findings of fact but contended that, by analogy with the reasoning of Dixon C.J. in Finn's case, the deduction claimed under sec. 51(1) should
ATC 4520necessarily have been allowed as a matter of law. In my opinion, the appeal raised a question of law and, accordingly, the Court had jurisdiction to entertain it.''
His Honour then made orders as follows:
``In the result, the appeal must be dismissed. Because the Commissioner's objection to competency was not successful, it is appropriate that the taxpayer pay seven-eighths of the Commissioner's costs.
I make the following orders:
- 1. Appeal dismissed.
- 2. Applicant to pay seven-eighths of the respondent's costs.''
The Notice of Appeal set out the following grounds:
``(a) The learned Judge erred in holding that the child minding expenses incurred by the Appellant in 1982, 1983, 1984 and 1985 taxation years were not deductible expenses under Section 51(1) of the Income Tax Assessment Act 1936 (`the Act').
(b) The learned Judge should have held that the said expenses were allowable deductions under Section 51 of the Act.
(c) The learned Judge erred in holding that Commissioner of Taxation v. Finn (1961) 106 C.L.R. 60 did not apply to the facts of this case with the result that the expenses were deductible under Section 51 of the Act.
(d) The learned Judge erred in holding that Lodge v. F.C. of T. (1972) 128 C.L.R. 171, Martin v. F.C. of T. (1984) 2 F.C.R. 260 and Hyde v. F.C. of T. (1988) 88 ATC 4748 applied to the facts of this case with the result that the expenses were not deductible under Section 51(1).
(e) The learned Judge erred in holding that the essential character of the expenditure was neither incidental nor relevant to the Appellant's activities as a computer systems officer.
(f) The learned Judge erred in characterising the provision of child minding services as services provided to the child rather than to the Appellant or alternatively, to both the Appellant and the child.
(g) The learned Judge erred in holding that the expenses were not relevant to the education of the Appellant and thus to the earning of her income in the sense explained by the authorities.
(h) The learned Judge should have held that the essential character of the child minding expense was incidental and relevant to the Appellant's activities as a computer systems officer in the same way as -
- (i) other self education expenses including photocopying, postage, home heating and lighting, which expenses were allowed by the Respondent;
- (ii) the hotel and sundry expenses allowed in Finn.''
The appellant seeks the following orders:
``(a) That the appeal be allowed.
(b) That the orders made by His Honour Justice Beaumont on 21 August 1990 be set aside.
(c) That the disallowance of child minding expenses incurred by the Appellant in 1982, 1983, 1984 and 1985 by the Commissioner for Taxation be set aside.
(d) That the respondent pay the costs of the Appellant of this appeal and the hearing before His Honour Justice Beaumont.''
Before us, counsel for the appellant submitted, as had been submitted before his Honour, that there was no relevant difference between the expenses incurred by the appellant for child minding here involved and the other expenditure incurred in furthering her education, which had been allowed by the Commissioner being for books, photocopying and the like. Further, it was submitted that the decisions in Lodge, Martin and Hyde, to which his Honour referred, were distinguishable since, in each of those cases, the child care expenditure was necessary to obtain the taxpayer's employment or other income earning activity whereas here the appellant was in employment so that the expenditure could not be characterised as expenditure which was incurred prior to the income-producing activity itself being undertaken. Alternatively, it was submitted that Lodge, Martin and Hyde were wrongly decided or should be decided differently today having regard to changing social circumstances.
It might be mentioned that before his Honour the correctness of these cases was accepted by
ATC 4521the appellant. Where it is proposed to ask the Full Court to reconsider the correctness of a decision of a previous Full Court, it is important that the submission be put below so that the parties are aware that the matter is to be argued on appeal and also so that consideration can be given to the appropriate constitution of the Full Court hearing the appeal. We permitted the matter to be argued, however, notwithstanding that it had not been argued below, but rather conceded.
In our opinion, his Honour correctly set out the applicable principles and applied them to the facts of the present case. The expenditure here in issue lacked the necessary connection with the activities of the appellant from which she gained her assessable income, that is to say, her employment with the public service. It was not, in the sense used in the cases, incidental and relevant to the end of gaining or producing assessable income. The essential character of the expenditure also stamped it as private expenditure excluded from deductibility under s. 51(1).
We are not persuaded that the Court should depart from its reasons in Martin, or for that matter that that case was incorrectly decided. Lodge's case which formed the cornerstone of the Court's reasons in Martin was an application of well established principles to the facts before it and, with respect, in our opinion was correctly decided. If the law is to be changed to permit a deduction for child minding expenses, a matter on the desirability of which we express no opinion, it is a matter for the legislature and not this Court.
Accordingly, the appeal is dismissed, with costs.