FC of T v MI ROBERTSJudges:
This is an appeal by the Commissioner of Taxation (``the Commis- sioner'') from a decision of the Taxation Appeals Division of the Administrative Appeals Tribunal (``the Tribunal'') in respect of claim for a deduction for self education expenses under s. 51(1) of the Income Tax Assessment Act 1936 (``the Act''). The Tribunal by its decision of 1 November, 1991 determined that the objection decision under review be set aside and the objection allowed in part by allowing a deduction totalling $29,212.00.
The respondent taxpayer (``the taxpayer'') claimed the amount of $32,502.00 as a deduction for ``over $250.00 work-related self- education'' in his 1989 Income Tax return. The taxpayer's claim as set out in the Notice of Objection [see Case Y54,
91 ATC 471] is as follows (edited by the Tribunal to maintain confidentiality) [at 472]:-
$ Tuition Fees -- University 24,260 Less 250 ------ 24,010 Accommodation at University 5,368 Travel to University City 1,730 * Photocopying 140 * Stationery 116 * Taxis for field trips 59 * Telephone 90 Depreciation of Computer 937 Replacement of HP5C Calculator 52 ------- $32,502 -------
The basis for the claim including the items marked with an asterisk (*) could not be substantiated in full before the Tribunal and the claim was reduced to $29,212.00.
Evidence was given before the Tribunal by the taxpayer and his employer and the parties tendered an agreed statement of material facts. The Tribunal found that the taxpayer graduated with a Bachelor of Engineering degree in December, 1976 and from that time occupied a number of positions as an employee of coal mining companies, in due course obtaining his under-manager's certificate and eventually becoming a mine manager in 1984.
The Tribunal found that, although the parties agreed that the taxpayer's occupation or profession was mine manager, the evidence before the Tribunal did not support that agreed fact. It found that it was clear that the taxpayer followed the occupation of mine manager for many years, but that his profession was more correctly described as mining engineer.
The taxpayer gave evidence that he had been encouraged by various people to not only obtain an engineering degree, but also to equip himself as manager by undertaking management studies. In this regard the taxpayer, having been a mine manager from 1984, had, by September 1987, submitted various applications for admission to overseas Master of Business Administration programs. Those applications had resulted in his being offered a place as a postgraduate student at a University in the United States of America. In June, 1988 the taxpayer accepted a placement offer at the University of Chicago. The taxpayer was retrenched as a mine manager by notice in late June, 1988 from his then employer when that employer decided to close or sell a number of its mines. The retrenchment took effect on 29 July, 1988. The taxpayer's evidence indicated that the retrenchment was with his consent. The Tribunal formed the view from the taxpayer's evidence that he may not have been retrenched if he had resisted the action, but that, as he had pointed out in his evidence, he was the youngest of the mine managers employed by the company and therefore at risk of being retrenched.
The Tribunal found that prior to his retrenchment, and also prior to his acceptance of the offer of a place by the University, the taxpayer had discussions with another mining company with a view to his employment by that company. The Tribunal found that, while it
ATC 4789would be true to say that those discussions were promising from the taxpayer's point of view it would be incorrect to say, on the evidence, that he obtained a firm promise of employment as a result of those discussions.
Following his retrenchment from employ- ment at the end of July, 1988 the taxpayer commenced the Master of Business Administration program at the University in September, 1988 and completed the course of study in June, 1990 after 21 months of full time study.
Prior to completion of the studies, the taxpayer received and accepted an offer of employment as a mine manager from the mining company with which he had had discussions in early 1988. Upon completion of his studies, he commenced full time employment with that mining company in August, 1990. The Tribunal found that the taxpayer's designation in his new position was that of General Mine Manager. It found that this position carried a significantly increased salary when compared to his previous position.
The Tribunal also found that the taxpayer was correctly described as a professional mining engineer with particular expertise in management of coal mines. It found that that was his expertise prior to his enrolment in the Master of Business Administration course and that the evidence before the Tribunal established that this was still his expertise and also his occupation as mine manager in his present position. The Tribunal found that the taxpayer had not sought to move into other areas of expertise, but had merely sought to increase his learning, knowledge, experience and ability in his profession as a mining engineer specialised in managing coal mines.
The Decision of the Tribunal
``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.''
the Tribunal was of the view that ``that dicta of his Honour sums up very succinctly the basis on which the applicant makes his claim''. The taxpayer before the Tribunal had relied upon the judgment of Dixon C.J. in Finn as supporting a right to the deduction.
After stating that the taxpayer was correctly described as a professional mining engineer with particular expertise in management of coal mines, and concluding that the taxpayer had not sought to move into other areas of expertise, the Tribunal continued [at 474]:-
``16. The decision in FC of T v Kropp 76 ATC 4406 makes it clear that it is not fatal to the claim that the applicant terminated his employment before going overseas to undertake the course of study. Nor, in my view, is it fatal to his claim that he resumed employment in Australia as a mining manager with a different employer upon completion of the course. He was a mine manager before he left Australia and he became a mine manager (on an increased salary and in a more responsible position) upon his return to Australia. He did not seek to change his expertise or the nature of his occupation. All he did was to seek to increase his expertise with a view to increasing his assessable income. The evidence establishes that he succeeded although as Finn's Case shows it is the expectation rather than the result which is the relevant test.
17. It follows therefore that there is a sufficient connection between the outgoings incurred in undertaking the Master of Business Administration course and the applicant's assessable income derived as a mine manager thereby bringing the outgoings within the first positive limb of sub-section 51(1) of the Act. It is now beyond argument that such outgoings cannot be characterised as being of a capital nature (FC of T v Hatchett 71 ATC 4184). On my findings it cannot be said that the amount claimed is of a private or domestic nature.''
The Issues Upon Appeal
The central issue upon appeal is the construction of s. 51(1) of the Act. That section provides:-
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are
ATC 4790necessarily 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.''
It is common ground that the second limb of s. 51(1), relating to the carrying on of a business, has no application in the present case. The Commissioner conceded as beyond argument that expenditure can be allowed as a deduction even though one cannot see any particular productive effect for it in the current income year:
FC of T v Finn (1961) 12 ATD 348 at 351; (1961) 106 CLR 60 at 68 per Dixon CJ;
Fletcher v FC of T 91 ATC 4950 at 4957, 4958; (1991) 66 ALJR 11 at 16, 17.
It was submitted before this Court on behalf of the Commissioner that none of the claimed expenditure (principally MBA tuition fees and living expenses) was incurred in gaining or producing assessable income. Three arguments were advanced in support of this submission.
First, that it was decisive that the taxpayer was not in employment at the time the expenditure was incurred, nor during the relevant income year, and no court has ever allowed a self-education deduction to an unemployed taxpayer:
FC of T v. Hatchett 71 ATC 4184; (1971) 125 CLR 494;
FC of T v. White 75 ATC 4018; (1975) 1 NSWLR 1;
FC of T v. Kropp 76 ATC 4406; (1977) 28 FLR 375;
FC of T v. Smith 78 ATC 4157; (1978) 36 FLR 95;
FC of T v. Lacelles-Smith 78 ATC 4162;
FC of T v. Highfield 82 ATC 4463; (1982) 62 FLR 262;
FC of T v. Wilkinson 83 ATC 4295; (1983) 47 ALR 765;
FC of T v. Klan 85 ATC 4060; (1985) 80 FLR 320; and
FC of T v. Studdert 91 ATC 5006.
Secondly, that properly characterised, all of the deductions claimed were ``prerequisite'' to gaining or producing assessable income, but that, according to the authorities, did not make them deductible:
Lunney v. FC of T (1958) 11 ATD 404; (1957-1958) 100 CLR 478;
FC of T v. Maddalena 71 ATC 4161; (1971) 45 ALJR 426;
Fullerton v. FC of T 91 ATC 4983 (the ``travel to work cases'');
Lodge v. FC of T 72 ATC 4174; (1972) 128 CLR 171;
Martin v. FC of T 84 ATC 4513; (1984) 2 FCR 260;
Hyde v. FC of T 88 ATC 4748;
Jayatilake v. FC of T 91 ATC 4516 (the ``child minding cases'').
Thirdly, all of the expenses claimed were private for the same reasons given by Menzies J in Hatchett in relation to the university expenses in that case; namely that the taxpayer in that case was a teacher before and afterwards, and the taxpayer in the present case was a mine manager before and afterwards. The Commissioner expressly declined to argue that the living expenses claimed were private because of an absence of an Australian residence at the relevant time.
Counsel for the Commissioner submitted that ``the high water mark of the taxpayer's factual position'' was a letter from his new employer which, it was submitted, described in effect the worth of his educational endeavour in the United States as regards his new employment. That letter, dated 25 July 1990, was not referred to by the Tribunal in its Reasons for Decision, but was part of the evidence before the Tribunal. It reads as follows:-
``TO WHOM IT MAY CONCERN
I, Arthur James West, certify that Mr. Malcolm Roberts visited the offices of ARCO Coal Australia Inc on 22 January, 1988 and met with Mr. Jack Anderson, President, and myself, to discuss possible future employment opportunities, particularly if the Gordonstone project was to proceed.
At that time, Mr. Roberts was still employed by Coal & Allied as Manager of one of their underground mines, but was seriously considering an MBA at an American University.
It was indicated to Mr Roberts that we could not guarantee any future employment but as a company prepared to invest in the Australian coal mining industry, we would be in the market for well qualified technical and managerial staff from time to time. It was considered that an MBA from a reputable university would be well regarded.
When the time came to seek a General Mine Manager for the Gordonstone Colliery, it was considered that Mr Roberts, with his mining background soundly supported by his MBA studies, would be a strong candidate for the aforementioned position.
An offer of employment was made and accepted. Mr Roberts will commence in his new role in August 1990.''
Counsel submitted that it was apparent from this letter that there was no contractual obligation on the taxpayer in the present case to obtain the MBA qualification. There was merely an indication from a prospective employer that such a qualification would be desirable. But even if the taxpayer had been required, as a term of his employment to incur the expenditure in question, that would not of itself have made it a deductible outgoing:
FC of T v Cooper 91 ATC 4396 at 4415; (1991) 29 FCR 177 at 200 per Hill J.
It is clear that the Tribunal found that as a result of the taxpayer's original discussions with Arco Coal Australia Inc. that there was no firm promise of employment although from the taxpayer's point of view the discussions were promising.
Counsel for the Commissioner further submitted that, as was recognised by Menzies J. in Hatchett, the dicta of Windeyer J. in Finn used language more apposite to the second limb of s. 51(1), which was plainly inapplicable to the facts; and that the correct principles to be derived from Finn are those enunciated in the judgments of Dixon CJ. and Kitto J. It was also submitted that the Tribunal erred in deciding that the decision in Kropp made ``it clear that it is not fatal to the claim that the applicant terminated his employment before going overseas to undertake the course of study''. It was submitted that, as in all other cases where self-education expenses were allowed, the successful taxpayer was in employment, in that case with an overseas affiliate of his former and subsequent employer. The criticism of Kropp by Ormiston J. in Klan at ATC 4067; FLR 330 was also cited.
For the taxpayer, it was submitted that the correct approach in determining whether expenditure fell within the first limb of s. 51(1) is to identify the assessable income which was expected to be derived by the taxpayer on his resumption of work at the completion of his course, in his chosen field of work - that is, as a mining engineer specialising in the management of coal mines. Having identified that income, one must then assess the degree of connection, or nexus, between that income and the relevant expenditure. It was submitted that in the present case, the facts showed a very immediate or close connection between the expenditure and that income. There was no relevant distinction between the nature of the taxpayer's work before undertaking the MBA course and his work after it. The expenditure, it was submitted, was not incurred in obtaining qualifications for a different type of work (eg Klan), nor was it the cost of changing from one job to another (cf. Maddalena). It was further submitted that there is no authority to the effect that an expenditure in increasing a professional expertise should be disallowed as a deduction if, at the time it is made, the taxpayer was not employed. This proposition, it was submitted, is inconsistent with the decision in Kropp.
The claim by the taxpayer included the sum of $937.00 for depreciation of a computer. It appears from the Reasons for Decision, that before the Tribunal, it was conceded on behalf of the Commissioner that this amount was deductible under s. 54 of the Act if the Tribunal decided that the balance of the claim was deductible under s. 51. Before this Court, it was conceded on behalf of the Commissioner that, although this claim strictly fell within the compass of s. 54 rather than s. 51, if the principles applied by the Tribunal were correctly applied in relation to s. 51, the deduction flowed under s. 54. It was common ground before this Court that, if the deduction is allowed, the sum of $250.00 has to be deducted pursuant to s. 82A of the Act.
As Hill J. stated in Cooper, the concepts enshrined in s. 51(1) have been elaborated upon over many years by the High Court, most recently in Fletcher. In that case, the High Court said (at ATC 4957-4958; ALJR 16-17):
``... the reference in it [s. 51(1)] to `the assessable income' is not to be read as confined to assessable income actually derived in the particular tax year. It is to be construed as an abstract phrase which refers not only to assessable income derived in that or in some other tax year but also to assessable income which the relevant outgoing `would be expected to produce'.
The question whether an outgoing was, for the purposes of s. 51(1), wholly or partly `incurred in gaining or producing the assessable income' is a question of characterisation. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant
ATC 4792kind. It has been pointed out on many occasions in the cases that an outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it was `incidental and relevant to that end'. See, e.g., Ronpibon Tin (1949) 8 ATD, at p. 436; (1949) 78 C.L.R., at p. 56;
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344 at p. 350;
Lunney v. F.C. of T. (1958) 11 ATD 404 at p. 411; (1957-1958) 100 C.L.R. 478, at p. 497; John 89 ATC, at p. 4105; (1989) 166 C.L.R., at p. 426;
Ure v. F.C. of T. 81 ATC 4100, at pp. 4103, 4109; (1981) 50 F.L.R. 219 at pp. 223, 231; 34 A.L.R. 237, at pp. 241, 248; Riverside Road 90 ATC, at p. 4574; (1990) 23 F.C.R., at 311-312. It has also been said that the test of deductibility under the first limb of s. 51(1) is that:
`it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.'
See e.g., Ronpibon Tin (1949) 8 ATD, at p. 436; (1949) 78 C.L.R., at p. 57; John 89 ATC, at p. 4105; (1989) 166 C.L.R., at p. 426.
So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterisation for the purposes of the first limb of s. 51(1). At least in a case where the outgoing has been voluntarily incurred, the end which the taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterisation of either the whole or part of the outgoing for the purposes of the sub-section. See, e.g.,
W. Nevill & Co. Ltd. v. F.C. of T. (1937) 4 ATD 187 at p. 193, 199; (1937) 56 C.L.R. 290 at pp. 301, 308;
F.C. of T. v. South Australian Battery Makers Pty. Ltd. 78 ATC 4412 at p. 4420; (1977-1978) 140 C.L.R. 645 at p. 660; John 89 ATC, at p. 4105; (1989) 166 C.L.R., at p. 426;
Magna Alloys and Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4547; (1980) 49 F.L.R. 183 at p. 189; 33 A.L.R. 213, at pp. 218-219; Ure 81 ATC, at p. 4103; (1981) 50 F.L.R., at pp. 231-232; 34 A.L.R., at pp. 248-249;
F.C. of T. v. Ilbery 81 ATC 4661 at pp. 4666-4667; (1981) 58 F.L.R. 191 at pp. 199-201; 38 A.L.R. 172, at pp. 179-180. In that regard and in the context of the sub-section's clear contemplation of apportionment, statements in the cases to the effect that it is sufficient for the purposes of s. 51(1) that the production of assessable income is `the occasion' of the outgoing (see, e.g. Ronpibon Tin (1949) 8 ATD, at p. 436; (1949) 78 C.L.R., at p. 57; John 89 ATC, at p. 4105; (1989) 166 C.L.R., at p. 426) or that the outgoing is a `cost of a step taken in the process of gaining or producing income' (see John 89 ATC, at p. 4105; (1989) 166 C.L.R., at p. 427) are to be understood as referring to a genuine and not colourable relationship between the whole of the expenditure and the production of such income.
Nonetheless, it is commonly possible to characterise an outgoing as being wholly of the kind referred to in the fist limb of s. 51(1) without any need to refer to the taxpayer's subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income. In such a case, the characterisation of the particular outgoing as wholly of a kind referred to in s. 51(1) will ordinarily not be affected by considerations of the taxpayer's subjective motivation....
The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing.''
Another formulation of the relevant principle was enunciated by the High Court in
FC of T v. D.P. Smith 81 ATC 4114, at 4117; (1980-1981) 147 CLR 578, at 586:-
``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.''
It is well established that self-education expenses may be deductible outgoings pursuant to the first limb of s. 51(1): Finn, Hatchett (as to expenses incurred in respect of a THC),
ATC 4793Smith, Lacelles-Smith, Wilkinson, and Studdert. In all of these cases, the taxpayer remained at all times - including before, at, and after the time the outgoing was incurred - in the employ of the same employer. In other words, to use the words of Ormiston J in Klan - a case where the deduction was not allowed - all these cases are cases ``involving self-education or overseas travelling expenses directed to obtaining new or better paid appointments with the same employer''. There are only two other cases referred to by counsel where a taxpayer was allowed a deduction in respect of self- education expenses. The first, Highfield, fell within the ambit of the second limb of the subsection, and is accordingly irrelevant to the present case. The second case, Kropp, was relied upon by the Tribunal and by the taxpayer upon appeal. It appears, on a superficial reading at least, to be anomalous, because there the taxpayer resigned from his job before travelling overseas.
The decision of the High Court in Finn concerned a design architect employed on salary by a government department. The deductions claimed were for travelling expenses. Those expenses were incurred in overseas travel during leave for the purpose of bringing the taxpayer up to date with trends in architecture and for bettering his prospects of future promotion. At the request of the department, the taxpayer also included in his itinerary a visit to South America. Dixon CJ (at ATD 350-351; CLR 66-68) held:-
``The words of s. 51 which are most material to the primary question on which the taxpayer's claim to a deduction depends are `incurred in gaining or producing the assessable income'. With respect to this phrase, before the consolidation of 1936 was made it was remarked that `the expression " in gaining or producing" has the force of " in the course of gaining" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to the purpose itself'...
From the facts that have been stated above three or four conclusions may be drawn which perhaps may be considered to govern the question whether the expenditure was incurred in gaining or producing the assessable income. In the first place it seems indisputable 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.... In the second place, so far as motive or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. In the third place it is apparent that 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, increase his professional knowledge and study modern trends, 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. In the fourth place it was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service. He was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government. His journey abroad and what he did while in Europe, as well as in South America in the following year of income, was therefore in a correct sense incidental to his employment and most relevant to it.
When the foregoing elements are considered in conjunction, they do seem to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income....
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.''
Kitto J. (at ATD 352; CLR 69-70) held:-
``His 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
ATC 4794Public Works Department of Western Australia. It is, I think, a correct application of the terminology of s. 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 was 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....
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.''
As Hill J. noted in Studdert (at 5015), the remarks of Windeyer J. in Finn went beyond those of Dixon CJ. and Kitto J. His Honour said (at ATD 352; CLR 70):-
``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. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not, in my opinion.... Outgoings incurred for the genuine purpose of acquiring or maintaining knowledge and skill in a vocation do not become an outgoing `of a private nature' simply because the taxpayer got pleasure and satisfaction in increasing his knowledge and attainments.''
In Hatchett, a decision of Menzies J, the taxpayer was a teacher employed by the Western Australian education department. The deductions claimed were in respect of two separate payments. The first was in connection with the submission of theses for the purpose of gaining a Teacher's Higher Certificate (THC). Possession of that certificate was expected to lead forthwith to an increase in earnings. The second was a claim for payment of university fees for subjects in the Faculty of Arts, part of which was reimbursed by the Education Department. The taxpayer claimed a deduction in respect of the balance. Menzies J, in holding that the fees in respect of the THC were deductible under s. 51(1), said (at ATC 4186-4187; CLR 498):-
``The question first to be dealt with is whether the outgoings to obtain the Teacher's Higher Certificate were incurred in gaining the assessable income of the taxpayer. It is now beyond doubt that, in considering this question, consideration must be given to the assessable income of future years as well as that of the year in which the outgoing occurs. The evidence... establishes that the possession of a Teacher's Higher Certificate would not only enable the taxpayer to earn more in the department in the future, it forthwith entitled him to be paid more for doing the same work without any change in grade. If the certificate had been obtained during a tax year, instead of at the end of a tax year as was the case, it would have entitled the taxpayer to greater earnings in that year. The taxpayer, in reliance upon the conditions of his employment, spent money to earn more. In these circumstances the outgoings necessary to obtain the certificate ought, I think, to be regarded as outgoings incurred in gaining assessable income. This conclusion is, I think, supported by the decision in F.C. of T. v. Finn...
My conclusion that the expenditure in gaining the Teacher's Higher Certificate was incurred in gaining assessable income in the circumstances carries with it the conclusion that the expenditure was not of a private nature. It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive. So, for instance, the
ATC 4795payment of medical expenses is of a private nature and is not incurred in gaining assessable income, notwithstanding that - sickness would prevent the earning of income. I am satisfied that the payments here in question, falling, as I decide, into the first category, do not fall within the second.''
However, his Honour rejected the claim in respect of the amount paid for university fees, holding (at ATC 4187; CLR 499):-
``The university fees paid were paid with the encouragement of the department; it contributed towards them. This, however, is not, of itself, enough to bring the fees within sec. 51. Enlightened employers often encourage employees to improve their bodies and their minds, and assist them to do so. Such encouragement is not, of itself, enough to warrant the deduction of outgoings for these purposes. The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income?
Here, I am not dealing with the general question whether the payment of university fees can ever afford a deduction from assessable income; I am dealing with the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible. As I have said, I am not able to find any connection between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who 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 the assessable income. Had the taxpayer paid fees for subjects in the Faculty of Law, it would, I think, have been obvious that the fees were not allowable deductions. In my view the payment of such fees would have as much connection with the taxpayer's assessable income as the fees in fact paid. In the conclusion that the university fees paid are not deductible, I believe that I am supported by F.C. of T. v. Finn...''
After a consideration of the judgments of Dixon C.J. and Kitto J. in Finn, his Honour continued at ATC 4188; CLR 500:-
``Each citation emphasises a relationship between the assessable income and the outgoing incurred to gain it.''
His Honour then cited from the judgment of Windeyer J. and observed:-
``Windeyer J., by reason of his use of the words `necessarily' and `in carrying on', seems to me to have treated the expenditure in Finn's case as within the second limb of sec. 51, i.e. outgoings necessarily incurred in carrying on a business, but, as Dixon C.J. pointed out..., that case had to be decided by reference to the first limb. As his Honour said; `The second limb cannot apply because it relates to outgoings of a business and " business" is defined by sec. 6(1) in terms which expressly exclude an occupation as an employee'. This applies here. The payment of university fees was, I think, expenditure of a private nature notwithstanding the assistance given by the department.''
Menzies J's statement that ``there must be a perceived connection between the outgoing and the assessable income'' was considered by the Full Court of this Court in Martin v FC of T at 84 ATC 4513; FCR 263. The Full Court held that it did not believe that Menzies J was purporting to substitute some new test for the principles well established in earlier authorities. The Court agreed that Menzies J was not saying that such a connection was sufficient by itself and that, in the language of the Act, the expenditure must be ``incurred in gaining or producing the assessable income''.
Before leaving the self-education cases, it is necessary to consider in detail the cases of Kropp and Klan. In Kropp, a decision of Waddell J of the Supreme Court of New South Wales, the taxpayer was a chartered accountant with the large Australian firm, Price Waterhouse & Co. That firm had international affiliates of the same name. The taxpayer, with the encouragement of his employers, resigned his employment on 30 April 1972, and the following day, flew overseas at his own expense to take up employment with an affiliated firm, commencing employment on l August 1972. Two years later, he returned to Australia and was re-employed at a more senior level by his former Australian employer. He
ATC 4796claimed that the cost of the airfare was an allowable deduction.
Significantly, his Honour found (at ATC 4407; FLR 376-377):-
``The Australian firm sends, at its expense, selected senior members of staff to overseas firms for secondment each year pursuant to the `International Firm Staff Exchange Scheme'. However, there are expense limits to the number of staff which can be sent overseas in this way and for many years a policy has been actively pursued of encouraging staff members who indicate their willingness to pay their own way to work with Price Waterhouse firms in other countries. A substantial majority of the staff who have travelled overseas at their own expense have rejoined the Australian firm some two to three years after leaving it. At the present time there are, in the Sydney office alone, thirteen staff members who have made private trips overseas to work for Price Waterhouse firms overseas at their own expense. Of these six are now managers and four assistant managers.
The policy of encouraging staff to travel overseas at their own expense is pursued because it is thought to provide very substantial and tangible advantages for the Australian firm and for the members of staff concerned.''
In allowing the deduction, Waddell J said (at ATC 4411; FLR 383):
``The expenditure was part of a plan pursued by the taxpayer to increase his income from his employment as an accountant by the acquisition of two years' overseas experience with a national firm associated with his Australian employer, 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 his salary in his remaining professional life would be accelerated. These considerations provide, to my mind, the necessary `perceived connection' between the outgoing and the assessable income so that it can fairly be said that the outgoing was `incurred in gaining the assessable income' of future years in Australia.''
The decision in Kropp was considered by Ormiston J of the Supreme Court of Victoria in Klan. In Klan the taxpayer was a history teacher who resigned from an Australian school and travelled to Britain to obtain a teaching post there and to undertake research towards a higher degree. He contemplated that these activities would make him a more suitable applicant for the headmastership of an independent school in Australia. He subsequently returned to Australia to a senior teaching position with a different school, Mentone Grammar. He claimed a deduction for his travelling and removal expenses to Britain. In holding that this expenditure was not deductible, Ormiston J referred to the evidence and submissions advanced on behalf of the taxpayer, and said (at ATC 4065; FLR 324):-
``In particular, it was asserted that, on a proper understanding of those cases [Finn and Hatchett etc], 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. at 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 Mentone Grammar] 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.''
His Honour continued (at ATC 4067; FLR 329-330):
``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
ATC 4797outgoing incurred in the course of earning the wages payable in the employment': per Barwick C.J. in F.C. of T. v. Maddalena... 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...''
Ormiston J then went on to critically analyse the decision in Kropp. He noted the case that 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, and commented (at ATC 4067; FLR 330):
``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 on increase of his 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.''
His Honour then went on to conclude (at ATC 4068; FLR 330):
``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.''
In my opinion, Ormiston J's analysis of the self-education cases and of Kropp's case in particular is correct. Because of the particular arrangements and practices of Price Waterhouse's Australian branches regarding its employees working with its international affiliates, I consider that the taxpayer in Kropp, at least analogously, falls into the general category of one who ``in reliance upon the conditions of his employment, spent money to earn more''. It was not, strictly speaking, a condition of his employment that, if, having resigned his Australian position, he spent money going overseas to work with the firm's international affiliates, his employer would re- employ him in a better position and his prospect for promotion would be significantly enhanced, but it seems to me, that that was the practical effect of the standard arrangements and practices of the firm vis-à-vis its employees. Thus, in my view Kropp's case is not anomalous to the other self-education cases where deductions have been allowed. It can properly be distinguished from Klan's case, and the principles enunciated by the High Court in Maddalena were not applicable to it.
The only other case that needs be considered for the purposes of resolving the present case is the High Court decision in Maddalena, the case relied upon by Ormiston J as determinative in Klan. There the taxpayer was in employment as an electrician and also as a professional football player, playing with a particular club. In the course of negotiating a change to a new club, he incurred travelling and legal expenses. The High Court held that the expenditure was incurred in getting, not in doing, work as an employee and was not deductible.
Barwick CJ, in a brief judgment, said (at ATC 4162; ALJR 426):-
``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.''
Menzies J held (at ATC 4163; ALJR 427):
``It is, I think, worthwhile to look at the taxpayer's earnings as an electrician to illustrate what I regard as the decisive difference to be observed here. 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....
What I have said about the taxpayer as an electrician is, I think, equally applicable to him as a professional footballer, and moneys spent to obtain a new employment are not allowable deductions for income tax purposes under s. 51.''
In Cooper, Hill J (at ATC 4411; FCR 197), speaking of s. 51(1), stated that ``what is important is that the concept enshrined in the first limb of the subsection is one of the deductibility of working expenses''. He later considered the decision in Maddalena and commented (at ATC 4412; FCR 198):
``In some cases, the outgoing in question may precede the income-producing operation or activity, so that it comes at a point too soon to be incidental and relevant to that activity. A clear example of such a case is... Maddalena.... That expenditure was incurred in getting work, rather than doing it. In other words, the expenditure did not itself qualify as a `working expense'.''
The Present Case
In my view, the expenditure in the present case falls squarely within the statements of Barwick CJ and of Menzies J in Maddalena cited above: they are moneys which were spent to obtain a new employment, albeit one in a better position and on higher wages. Being the cost to an employee of obtaining his employment, they do not form an outgoing incurred in the course of earning the wages payable in the employment. To use the phrase employed by Hill J in Cooper, those expenses cannot be described as ``working expenses''. It cannot be said that the taxpayer in the present case, in reliance upon the conditions of his employment, spent money to earn more: cf Hatchett. Nor can it be said that, at the time the expenses were incurred, the taxpayer was acting within the scope of his office, and therefore in the gaining of his salary: cf Finn.
Additionally, there is no relevant basis to distinguish the position of this taxpayer from the taxpayer in Klan. It appears from the facts that the taxpayer had always wished and intended to undertake management studies; that he was retrenched with his consent; that his retrenchment enabled him to attend an overseas university to pursue such studies; that prior to his retrenchment, and also prior to his acceptance of the offer of a place by the University, the taxpayer had discussions with another mining company with a view to his employment by that company; and that that company ultimately employed him on a significantly higher salary than his former employer. The words used by Ormiston J in relation to Mr. Klan apply equally to the taxpayer in the present case. ``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 [the taxpayer's] plans both as originally envisaged and as carried out were directed to the latter end. They were not mere incidents to his employment''.
For these reasons, the amount claimed is not deductible pursuant to s. 51(1) of the Act; and the Tribunal erred in law in determining that the objection decision under review be set aside and allowing a deduction totalling $29,212.00.
THE COURT ORDERS:
1. The appeal be allowed.
2. The decision of the Administrative Appeals Tribunal of 1 November, 1991 be set aside.
3. The decision of the appellant to disallow the respondent's objection against the assessment issued 19 December, 1989 be confirmed.
4. No order as to costs.