P Gerber DP
Administrative Appeals Tribunal
Dr P Gerber (Deputy President)
The applicant, at all relevant times a member of the Victorian Police Force, claimed some $22,635 self-education expenses incurred in the 1990 tax year, the expenditure being incurred in order to obtain a Commercial Helicopter Pilot's licence. Quantum is not in dispute.
2. Mr Ribbands, of learned counsel for the applicant, contented himself with calling only one witness, an expert, leaving the applicant in the well of the Hearing Room. I therefore have no evidence as to why this lady chose to obtain her commercial helicopter pilot's licence. This has left me in the unenviable position where I have to consider whether the taxpayer can succeed without any evidence as to her intent and purpose in incurring the impugned expenditure. Whether an expenditure is incurred ``in gaining or producing the assessable income'' within the meaning of sec 51(1) of the Income Tax Assessment Act 1936 (``the Act''), is a vexed question, made even more difficult where, as here, the expenditure was voluntarily incurred and I have no evidence what motivated the taxpayer in incurring it.
3. The applicant's Statement of Facts, Issues and Contentions states that she commenced her employment as a police officer with the Victorian Police Force in 1981, and that during the year of income now before me, she was at the year of income now before me, she was at all material times assigned to the Criminal Investigation Branch as a Detective Senior Constable.
4. It is stated that the applicant commenced the commercial helicopter pilot's licence course with Professional Helicopter Services Pty Ltd in August 1989 and that she took up a position in the Police Air Wing as an Air Observer in December 1990. It seems that she obtained her commercial helicopter pilot's licence in February 1991. However, due to internal budget cutbacks, she states in her Facts, Issues and Contentions that her career opportunities in the Air Wing were diminished and that she thereupon returned to the Criminal Investigation Branch in September 1991.
5. The respondent disallowed the claim on the basis that the self-education expenses were incurred in gaining an initial qualification, and hence did not qualify as a deduction under sec 51(1).
6. As noted before, the only witness - one Christopher Francis Morrison - was, in July 1990 the officer-in-charge of the Air Wing. Mr Morrison has sat on numerous selection committees within the Victorian Police Force, including the committee which appointed the applicant to the Air Wing as an Air Observer. He stated that the Air Wing itself generally trained its observers at its own expense at a cost of, roughly, some $50,000 for each qualified Air Observer. He detailed what was involved in qualifying for and being an Air Observer when such training was undertaken by the Police Department:
``The period of training is in excess of 100 hours on the helicopter by the time they get from the start to [finish] they end up being a fully qualified observer. To be a fully qualified observer you must have passed the observer's course - the theory part of it. You must then qualify as a winch crewman, [after which] you must then qualify as a winch operator. You must also work on the air ambulance and to do that we have to send you off for a course with the ambulance and they spend three days with the Ambulance Service. The entire Air Observer's course - because of the problems we had at the Air Wing with the availability of helicopters - if we could condense it as quickly as possible, would probably take about six months. It is a very detailed and complicated course. Because of the duties required, an Air Observer is in fact in charge of the helicopter. The pilot manipulates the machine, but it is the Air Observer who actually directs the machine to where it has to go; it is the Air Observer who is responsible for any winching that has to take place, it is the Air Observer who is the eyes and ears of D24 in the helicopter at the scene of a crime. You often see the helicopter going over to a scene of a crime, it is the Air Observer who is directing, in the first instance, traffic police cars to the scene. It is the Air Observer who may be looking for a missing person who is using his skills
ATC 522- to tell D24 or keep D24 or command, or whatever the case may be, what is going on, what is happening.''
(tr P 5)
7. The witness was to add that:
``A lot of applicants, to try and improve their chance at the selection board, will do courses on their own at their own expense.... [and having undertaken a commercial helicopter pilot course] would have given [this taxpayer] a distinct advantage for a selection at the Air Wing as an Observer.... The fact that she had undertaken the commercial pilot's course had indicated to us at the panel that she had the ability to navigate - she had demonstrated that because you can't get a licence without the ability to navigate - she had the ability to use the radio equipment in the machine. She also demonstrated to the Board that she had a demonstrable appreciation of aviation. She wasn't going to come there and after a month or so find, `I'm going to get air sick all the time', or, `I just don't like it'. In the meantime we had tipped a lot of money - or the Air Wing had tipped a lot of money - into the training of the student.... It's a very high expense area of the Police Force.'' (It should be noted that in the above evidence, the witness appeared to assume that the applicant was a qualified pilot [``you can't get a licence without the ability to navigate'' etc]. In fact, at the relevant time, the applicant had only commenced on her course.)
8. The witness was asked by Mr Ribbands about the applicant's prospects (being a qualified commercial helicopter pilot) of promotion within the Air Wing. He replied:
``Promotion within the Air Wing is very difficult (my emphasis). I will just elaborate quickly on that. As an Air Observer, there was only a position there for two Sergeants and one Senior Sergeant. This lady was a Senior Constable. To get promoted at the Air Wing is quite difficult. However, occasionally, from time-to-time, vacancies would occur, say, for a Sergeant. To apply for the position of Sergeant, one of the pre- requisites of being a Sergeant at the Air Wing [is] that you must have been and qualified as an Air Observer, which immediately eliminates most of the people from outside Air Wing - they don't hold the qualifications in the first instance. The fact that [the applicant] was at the Air Wing - she was qualifying as an Air Observer and she would have eventually got those qualifications - had there been a vacancy at the Air Wing for a Sergeant, she would most likely have got one of the positions, or would have been most suitable for one of the positions.''
(tr P 8)
9. I then asked the witness whether: ``in terms of future promotion, looking at the two streams - the one she was in and the one she chose to adopt - would she be better off in the long run on the probabilities?'' He replied:
``Yes, I appreciate what you are saying. It is very difficult to answer. Some members of the Police Force come into the Police Force with absolutely no intention of going any further than the CIB. They want to get into the CIB, that's all they live for. Other members have no interest in going to the CIB. However, with the targeted selected criteria, which I said before, which is now the adopted method of promotion and transfer in the Police Force, it is merit- based, and you have to be able to satisfy the panel that you have the ability to do, not just one job, but a number of jobs. Particularly when you start becoming a Sergeant or a Senior Sergeant or start getting to higher ranks, you could be called upon to do a number of tasks. The fact that you have been a Detective at one time in your career is a distinct advantage. For example, as a Sergeant, you might go to the scene of a crime. Had you been a Detective you are far more knowledgeable in what you would expect the uniform or younger members to do, because you know the problems that can be accounted with attending the scene of a crime.
THE D PRESIDENT: That doesn't really answer what I put to you, it might be very difficult to answer. What I am trying to learn is: there is a difference between someone who says: `Oh, I like flying' and chose to move from one area within the Police Force to another - that is one thing. The other one is: `By transferring to the Air Wing, I am likely, in the long run, to reach a higher level of promotion and therefore higher income'. I am asking, notionally: `Supposing she had stayed where she was in terms of promotion and income, is there any difference in one Wing as against the other?'
ATC 523- Again, it is difficult to say because of the fact that the targeted selected procedure is in place, as I said before, you have to be able to demonstrate that you have the ability to do other things. The fact that she went to the Air Wing has made available to her experiences that other members of the Police Force are not going to have. The fact that she is an Air Observer and in charge of a helicopter puts on her - or puts on the Air Observer - an enormous amount of pressure because of the fact that they are, as I said before, the eyes and ears of D24. They are in most cases the first police unit on the scene of a crime or a search, or whatever the case may be, and a lot of them through their rank of Senior Constable are performing duties that normally a Senior Constable would not be performing. They are put in charge of a scene until sometime later a more senior officer or higher-ranking person will come along and take charge. But in the first instance the very nature of their duty is such that they are put in charge of a scene in the first place. (tr p. 9)
MR RIBBANDS: Well, what about the situation, for example, where the mobile units are there first and the helicopter is called in afterwards; would it be of any benefit to have people on the ground who are skilled and know how helicopters work? - Yes, because then you can - you can, if you are on the ground, direct the helicopter - knowing full well what the availability of the helicopter is - what the limitations of a helicopter are. They are not the greatest things since sliced bread. They have their limitations, and it is good to have a person on the ground that knows the limitations of the machine.
And the nature of study, aside from the practical skills of piloting, the study that you undertake in support of a commercial pilot's licence, what are some of the fields that you go through there? - If you're going to do a helicopter pilot's licence, or any type of aviation licence, there are a number of components, such as navigation, meteorology, radio procedures, a certain part of the aircraft operating system, such as engines, air frames. It is quite a complex and detailed course.
And aside, then, from again being practically able to operate the helicopter itself, how or are these skills able to be employed in other fields of endeavour within the Police Force? - Well, the mere fact that you have an appreciation of navigation could benefit you. Had she, for example, transferred as a Sergeant to Mansfield, or one of the country areas where there are a lot of searches conducted, the mere fact that she has a very good appreciation of (a) helicopter use and ability, and (b) navigation could - in fact not could, would make her a very valuable asset, particularly at the scene.
And what about just in promotion generally. For example. She is now in the CIB, positions arise from time to time to become, as you said, a Sergeant or Detective Senior Sergeant or Detective Sergeant. If, for example, there were - this particular taxpayer and someone beside her who was as qualified but for the pilot's training, would that represent a category or something which the Police Force could take in - or you, as sitting on a Board could take into consideration in perhaps appointing her for the higher leadership position? - I would look at this taxpayer, as you call her, more favourably because I have an appreciation of what takes place on a helicopter training course. It is a very complicated course and it would show to me that this person has a degree of intelligence and comprehension that was probably a little bit higher than the average person because, having done part of the helicopter course myself, I know what is involved; the amount of study that's involved with it, the amount of appreciation and understanding that's involved with it.... The days of the old Mr Plod, who just joins the job and does nothing more for the rest of his career are over. If you join this Police Force today - because it's so diverse, it's so dynamic - if you don't undertake some form of external training, be it a degree of some description or some form of method of improving yourself, you are going to get nowhere. As I said, targeted selection as being the way it is on merit base, you have to be able to demonstrate that you have the ability, and a proven ability, to be able to do things that
ATC 524the average policeman can't do.''
(my emphasis - tr p 10-11)
10. In cross-examination, Mr Murphy asked the witness:
``The gist of your evidence, is it not, is that by undertaking a helicopter pilot's course, she became a far more attractive candidate than a person who had not undertaken such a course when you were considering her promotion into the Air Wing? - Yes. Had there been two applicants neck and neck, she would have got the nod because of the fact that she had the helicopter licence, yes.
And that is, I believe the process of this targeted promotion system that you use? - Well, the targeted process was not in at the time that she was appointed.
Well, in the case of the Air Wing, it meant that you would have far more confidence that she would be able to complete the course and become an appropriate observer? - Yes.
With the targeted promotion, it is fair to say, is it not, that if a candidate for any position has demonstrated, or has obtained qualifications in any other area, he or she therefore becomes more attractive? For example, if a candidate had gone off and done a degree in criminology, that candidate would be more attractive than a candidate who had not? - That's correct.''
(Mr Murphy assumed in his cross-examination, that the applicant's appointment to the Air Wing constituted ``Promotion''. However, there the evidence to that effect is very weak, if anything, Mr Morrison made it clear in answer to a question by me whether there was any differential in the applicant's income after her transfer to the Air Wing that:
``I would say she would have lost money by going to the Air Wing. By being a Senior Detective, you get a number of allowances, and going to the Air Wing, you don't get a number of allowances. So, in fact, she went back in financial return.''
(tr p 8))
11. The deliberate refusal to call the applicant has made it impossible for me to determine what motivated her to undertake her training course to become a commercial helicopter pilot.
12. The taxpayer relies on the first limb of sec 51(1). It is therefore incumbent on her to establish whether, and if so to what extent, the outgoings were incurred in gaining or producing her assessable income.
13. It is trite to observe that the question whether an outgoing is wholly or partly ``incurred in gaining or producing the assessable income'', when it is claimed as a deduction in reliance on sec 51(1), 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 kind. The fact that the motive of the taxpayer in incurring the expenditure may be a possible relevant factor in characterisation for the purposes of the first limb of sec 51(1) has clearly emerged from the decision of the High Court in
Fletcher & Ors v FC of T 91 ATC 4950, where, at p 4957, the Court stated:
``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 [sec 51(1)].''
14. In the absence of any evidence as to what end this taxpayer subjectively had in view in seeking to qualify herself as a helicopter pilot, I am left with the evidence of Mr Morrison - which I accept without hesitation - that training for a commercial helicopter pilot licence leads to ``a very good appreciation of (a) helicopter use and ability, and (b) navigation [which] could - in fact not `could', would make her a very valuable asset, particularly at the scene''. The witness was to add that the additional qualification would enhance a policeman or policewoman with a helicopter Pilot licence chances of promotion within the Force (at tr pp 10-11). Is that enough to characterise the outgoing as having the necessary nexus with the derivation of assessable income?
15. Since I have concluded that the above evidence satisfies the criteria which Hill J extracted from the decided cases in
FC of T v Studdert 91 ATC 5006, the applicant must succeed. However, because this case is not readily distinguishable from some earlier decisions in which similar claims have failed, I propose to analyse these cases to determine to
ATC 525what extent they no longer represent the current law.
16. A case raising not dissimilar facts as the ones before me came before Mr Trowse (Member) in Case V7,
88 ATC 142. The facts, taken from the headnote, were as follows:
``The taxpayer was a police constable employed by the South Australian Police Force. Since joining the force in 1982, the taxpayer aspired to be attached to the air wing of the force. Officers appointed to the air wing enjoyed brighter prospects for promotion and salary increases.
In order to be considered, an applicant not only had to be a police officer but also be suitably trained in the skills of flying. To this end the taxpayer commenced a part-time flying course in March 1983 and 12 months later obtained a restricted private pilot's licence. He then undertook further studies which resulted in his obtaining an unrestricted private pilot's licence in September 1984. Thereafter he pursued a course involving both theory and practical work in order to obtain a commercial pilot's licence. Passing the theory subjects was regarded as an essential prerequisite for appointment to the air wing, while the practical qualification was viewed as desirable.
In his 1985 return, the taxpayer claimed a deduction for expenses incurred in gaining his unrestricted private pilot's licence and commencing the course from which a commercial pilot's licence could possibly be obtained. The Commissioner disallowed the deduction and the taxpayer objected.''
17. In upholding the Commissioner's decision on the objection, Mr Trowse observed (at p 144):
``10. This first limb was considered in detail by the High Court in the case of
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, and the following extracts taken from the joint judgment demonstrate the nature of the relationship which must exist between the derivation of the assessable income and the incurring of the outgoing if such expenditure is to qualify as an allowable deduction. At pp. 56-57 the Court stated as follows:
`For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words ``incurred in gaining or producing the assessable income'' mean in the course of gaining or producing such income...
In brief substance, to come within the initial part of the sub-section 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.'
and further at p. 58:
`It is therefore necessary to return to the opening words of s. 51(1) and inquire to what extent the expenditure of the respective companies was incurred in gaining or producing the assessable income. The question is how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income.'
From the foregoing, it is clear that the extent or degree of the relationship between the outgoing and the assessable income is of major importance.
11. In the present reference it is difficult to see that the occasion of the payment is to be found in anything which directly produced the applicant's assessable income either in the 1985 year of income or any time thereafter. Put at its highest, the applicant's claim relies entirely upon the notion that, in the long-term the incurring of these outgoings may enable him to secure a post which would be more remunerative. Although it seems that the studies undertaken had some small influence upon his duties as a constable, e.g. map reading, that, when taken in isolation, is no warrant for concluding that the payments made were incidental or relevant to the salary earned by him in that position. To the contrary, it is my view that the outgoings were not incidental or relevant to the gaining of the income derived by the applicant during the 1985 year of income.
12. A recent case which involved a claim for outgoings directed at improving prospects in the future is
F.C. of T. v. Klan 85 ATC 4060
ATC 526. Mr Klan, a history teacher, resigned his teaching post in Australia and travelled to the United Kingdom where he obtained a teaching position. He contemplated that the experience gained from teaching overseas would further his career as a teacher in Australia. Upon his return that expectation was realised. In holding that the outgoings associated with the travel did not qualify as allowable deductions, Ormiston J. had the following to say at p. 4068:
`Although the deduction claimed in Maddalena's case was for rather mundane expenditure, the principles there stated are directly relevant to the present case and they solve the temporal dilemma posed by the requirements that outgoings should be incurred ``in'', i.e. in the course of, gaining or producing assessable income. It is one thing to assert that it is unnecessary that the outgoing need produce, as a matter of causation, assessable income in the year in which the outgoing was incurred. It is quite another to say that expenditure incurred which is entirely unrelated to existing activities which produce assessable income can come within the section because its object and long-term effect is better to equip the taxpayer to earn income in the future. In my opinion, the taxpayer's removal expenses to Colwyn Bay are properly characterised as outgoings incurred to fit him to obtain employment in new and more remunerative positions as a headmaster or head of a department on his return to Australia. It follows that, as those payments were of ``moneys spent to obtain a new employment'' they were not allowable deductions as outgoings incurred in gaining or producing assessable income: cf. per Menzies J. in Maddalena's case.'
It should be observed that the expenses incurred by Mr Klan occurred during a period of unemployment and yet, in my view, the above comments have equal application in a situation such as the present, where the duties and functions of the new post are markedly different to those of the one currently occupied.
13. The finding that the outgoings incurred bear little, if any, relationship to the activities engaged in by the applicant in the production of his assessable income and that instead they were directed towards a possible increase in salary at some unknown time in the future is one of the elements to be recognised in determining `how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income'. Others include the limited opportunities for appointment and the `fierce competition' from other suitably qualified officers. Having considered those and other factors, I have reached the conclusion that the nexus between the expenditure incurred and the gaining of assessable income is too remote to attract the operation of the subsection. In the language of the Act, the outgoings were not incurred `in' gaining or producing the assessable income.
14. Furthermore, I am of the opinion that the moneys outlaid on flying lessons are properly characterised as outgoings incurred to equip the applicant to obtain employment in a new and more remunerative position totally discrete from the one occupied by him. On that basis the expenditure was incurred in getting, not in doing, his work as an employee. It comes at a time `too soon to be properly regarded as incurred in gaining assessable income' - see comments of Menzies J. in
F.C. of T. v. Maddalena 71 ATC 4161 at p. 4163.''
18. That the cost of becoming a pilot is, in some circumstances, deductible is amply demonstrated by the fate of Mr Wilkinson, an air traffic controller who obtained his pilot licence and succeeded in his claim to deduct the cost from his assessable income, both before a Board of Review (of which I was then a Member) (Case P124,
82 ATC 629) and on appeal -
FC of T v Wilkinson 83 ATC 4295. On appeal, his Honour GN Williams J found that:
``In this case the respondent incurred the expenditure in question in order to better equip himself to fulfil his responsibilities as an air traffic controller.... He became better equipped to carry out the duties of his employment. It is indisputable on the evidence that the obtaining of flying qualifications and experience, the consequential greater appreciation of the responsibility of an air traffic controller, and
ATC 527the consequential increase in efficiency, made the advancement in the service more certain... The responsibilities of an air traffic controller... demand a progressive acquaintance with all aspects of aviation and there is an implied obligation incidental to the position that an air traffic controller will avail himself of opportunities to maintain and improve his efficiency.''
(at p 4303)
19. What assisted Wilkinson over the stile was the evidence that the applicant incurred the expenditure on flying lessons better to equip himself ``to carry out his duties of his employment''. In the present case, for all I know this taxpayer may have taken up flying because she preferred to work as an Air Observer or becoming a helicopter pilot, either with the Police Force or with a commercial aviation company, rather than walk the beat, direct traffic or investigate corporate fraud with her present employer. On that view, her improved efficiency in the Police Force was a mere ``by-product'' of her training as a helicopter pilot.
20. That brings me to the decision in FC of T v Studdert (supra). It is probably fair to say that, but for the decision in that case, this claim may not have proceeded to a hearing. The facts, taken from the headnote, were as follows:
``The taxpayer was a flight engineer employed by Qantas, flying in Boeing 747 passenger transport aeroplanes. Flight engineers supervise and regulate the delivery of power to the aeroplane from the jet engines. They sit directly behind the first officer, who sits beside the captain on such planes.
The taxpayer took flying lessons for which he claimed a deduction of $7,240 for the 1986/87 income year. The Commissioner disallowed the claim and the taxpayer objected.
The Administrative Appeals Tribunal allowed the objection. It found that the flying lessons improved the taxpayer's proficiency as a flight engineer. It also found that the taxpayer believed that the lessons increased his prospects of promotion to the higher grades of training flight engineer and senior check flight engineer.
The Commissioner appealed to the Federal Court. The Commissioner submitted that the Tribunal had erred in law in that... it failed to consider whether the taxpayer's dominant purpose in undertaking the flying lessons was to retrain as a flight officer; and... the sole basis of its decision, that the flying lessons improved the taxpayer's proficiency as a flight engineer, was not sufficient to make the cost of those lessons deductible.''
21. Before dealing with the decision on appeal, it is instructive to have regard to the findings of Deputy President Bannon QC (as his Honour then was) at first instance (summarised in the headnote at 91 ATC 2007). The learned Deputy President concluded, in allowing the objection:
``1. The flying lessons assisted the taxpayer in carrying out his duties. The uncontradicted evidence of the taxpayer was that the flying lessons improved his proficiency as a flight engineer. Constant efficiency was required from officers and a lapse in efficiency resulted in suspension from duties. It was a matter of common sense that the engineer understands not only his own duties as to the delivery of power, but also the interrelated combination of factors relating to the duties of the pilot which lead to the successful take-off and landing of the planes. The taxpayer was better equipped to perform his duties by reason of his flying lessons. There was a connection between the outgoing and the gaining of his income.
2. The taxpayer rightly believed that possession of proficiency in flying, and of a private pilot's licence, would assist his promotion to the higher grades of training flight engineer and senior check flight engineer. However, in view of the improved proficiency as a flight engineer, it was not necessary to decide if promotion prospects were a ground for deductibility. FC of T v Hatchett 71 ATC 4184... considered.
3. Even if the taxpayer had a motive to consider a possible transfer to a different occupation, it did not detract from accepting his evidence that the lessons were taken for the purpose stated in his income tax return.''
[The taxpayer claimed in his return for that year that the flying lessons made him more efficient in the performance of his duties as a Flight Engineer; it was silent as to whether his motive in undertaking the course was to achieve a more
ATC 528efficient performance in his job as an air traffic controller.]
22. On appeal, Hill J [at 91 ATC, pp 5015-5016], after an exhaustive review of the authorities, and in particular the decision in Wilkinson, concluded:
``Although the two matters of promotion and efficiency were both present in that case and in combination enabled his Honour (in Wilkinson) to reach the factual conclusion that he did, it does not follow from this that a factual finding that undertaking the course better equipped the taxpayer to perform his job was not, of itself, sufficient to enable a conclusion in favour of deductibility to be reached in that case. Particularly so, where, as here, it was also found as a fact that a motivation for undertaking the course was the gaining of that proficiency. (my emphasis)
I am of the view that in the present case these facts on their own, without reference to the effect of the course on promotion were sufficient to found the Tribunal's conclusion that the outgoing for the flying course fees had the necessary connection with the gaining or production of Mr Studdert's assessable income. They were relevant and incidental to that end, and relevant and incidental to the activities as flight engineer which more directly gained or produced that income. Put in another way, it was open to the Tribunal to reach the conclusion which it reached.''
23. That finding, the judge concluded, was sufficient to dispose of the appeal. However, since the gravamen of the Commissioner's complaint was that the Tribunal had failed to consider whether the taxpayer's dominant purpose in incurring the expenditure was to retrain as a Flight Officer (a finding which would, according to the Commissioner's argument, have been fatal to the claim), Hill J was prompted to examine the validity of that submission. I propose to set out much of his Honour's analysis - or rather re-analysis - of hallowed decisions which, one might have been forgiven for thinking, had been settled long ago.
``There have been a number of cases besides Hatchett which have considered the deductibility of self-education expenses. The starting point of any discussion is the decision of the High Court in
FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60. That case, as is well known, concerned the deductibility to a government architect of expenses of an overseas tour to Europe, made of his own volition, but which at the request of his employer included a visit to South America, found to have been devoted to architecture and its study and to have advanced his knowledge of architecture and the development of his architectural outlook and skill. The High Court unanimously found the expenditure deductible.
Dixon CJ (at ATD 350-351; CLR 67) expressed the view that there were three or four conclusions which governed the question on the facts of the particular case. The first was that the increased knowledge made Mr Finn's advancement in the service more certain. The second, `so far as motive or purpose' was material, was that the advancement in grade and salary formed `a real and substantial element in the combination of motives which led to his going abroad'.
It may be noted, in respect of the very first submission made in the present case that Sir Owen Dixon, even expressing the qualification that he did about the significance of motive or purpose, spoke in terms of `a real and substantial element', not the dominant element in the taxpayer's motivation.
The third matter to which Dixon CJ adverted was that the employer had treated the visit as being one of importance to it. The fourth matter was that the trip was undertaken while in the employment of the government and acting in accordance with his conditions of service.
These four elements in conjunction were, in his Honour's view, a firm foundation for the conclusion that the expenditure was incurred in gaining or producing the taxpayer's assessable income. However, nothing in the judgment suggests that each and every one of the elements there involved was necessarily to be found in arriving at this conclusion, or that his Honour was
ATC 529purporting to set out a test comprising the four elements, to which each (perhaps without the element of purpose or motivation) was relevant.
Kitto J, who was of the same conclusion, was prepared to put to one side the relevance of the expenditure to Mr Finn's prospects of promotion, thereby indicating in his Honour's view that that matter was not essential to the decision on the facts of the particular case. His Honour was of the view that it was incidental to the proper execution of Mr Finn's duties that he undertook the trip. This was despite the fact, which his Honour acknowledged, that he could not lawfully have been required to undertake the trip by the Department. It was incidental to his office that he should avail himself of opportunities to increase his knowledge relevant to his profession. The same may be said of Mr Studdert in the present case.
Finally, Windeyer J, who expressed the truism that each case must depend upon its own facts, propounded what may perhaps be an even wider view of deductibility when 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.'
If what is said by Windeyer J is applied in the present case (and it must be conceded that his Honour's remarks go beyond those of Dixon CJ or Kitto J) it is obvious that Mr Studdert would be entitled to a deduction on the facts of the present case.''
25. Out of an abundance of caution, having already held that the Tribunal's fact finding justified its finding in favour of the taxpayer, the learned judge concluded his decision with the observation:
``But if I be wrong in this it would, on the facts of the present case, be futile to remit it to the Tribunal for reconsideration. There is, as well, the additional finding that proficiency in flying would assist the taxpayer in promotion to higher grades in his current occupation. Although this does not appear to be a matter which the Tribunal took into account in reaching its conclusion, that finding, in combination with the other findings of fact, make the conclusion inexorable that the outgoing in question was incurred by Mr Studdert in gaining or producing his assessable income.''
26. After a careful reading of the decision in Studdert and applying the ``liberal'' view espoused by Windeyer J in Finn (supra), viz that anyone incurring an expenditure in increasing his or her knowledge, experience and ability in his or her occupation ``necessarily incurs those expenses in carrying on his [her] profession or calling'' (at p 70), I find that the evidence of Mr Morrison has satisfied the evidentiary onus resting on the taxpayer. True it is that to the extent that the High Court - post Finn - pointed out that motive ``may, depending on the circumstances of the particular case'' constitute an element, ``and possibly the decisive element'', in determining whether or not an expenditure, voluntarily incurred, has the necessary nexus with the derivation of assessable income; cf Fletcher & Ors v FC of T (supra), I note the qualification ``may'' and the gloss upon that statement in Studdert to the effect that Fletcher involved ``what appeared to be an audacious tax avoidance scheme''. The facts here do not constitute a tax avoidance scheme, audacious or otherwise, but appear to be a simple case of a policewoman incurring a (voluntary) expenditure on training for a pilot licence which had the effect of improving her skills as a policewoman generally. Heaven forbid that a police force, described as ``so diverse, so dynamic'' should consist only of Mr Plods because I have concluded, erroneously, that the Act penalises those who seek to advance their knowledge and skills in the course of their employment. On Mr Morrison's description of the present state of the Victorian Police Force, its professional status would seem to imply ``an obligation of progressive acquaintance with a living and developing art'' (per Kitto J in Finn at ATD p 352; CLR p 69).
27. For the above reasons, the objection decision is set aside and the applicant's objection allowed in full.
28. Since writing the above, I have become aware of the recent decision in Case 44/93,
93 ATC 481 (ST93/11), in which the Tribunal was
ATC 530constituted by Deputy President Burns and Members Lock and Trowse. In that case, the applicant had been employed as a postal clerk with Australia Post since leaving school. In January 1989, he took two years leave without pay to undertake various courses which qualified him to earn income as a charter pilot with a company referred to as ``M''. It seems that the applicant sought to claim as a deduction the cost of the course which gave him his instrument and instructor ratings - additional qualifications, which, so it was claimed, increased his income since it ``lifted his status as a preferred pilot''.
29. After an exhaustive analysis of the case law, including those analysed by me above, the Tribunal [at ATC p 484] rejected the claim on a finding that:
``[t]he applicant's... purpose in incurring the [impugned expenditure] was to increase his flying hours and thus hasten the probability of his employment as a pilot with one of the larger airlines companies. On a long term basis, the Tribunal accepts that such an appointment would provide the applicant with not only greater satisfaction but also a more remunerative position. In truth what the expenditure related to was the prospect of obtaining a new position at some stage in the distant future with a different employer. Regrettable as it may seem, expenditure of this kind does not form, on the authority of Maddalena (supra), an outgoing incurred in the course of earning the wages payable in [the] employment. Furthermore, there is a difference of fundamental importance between obtaining a new appointment and seeking preferment to a higher or different, but better... position with the same employer - see the decision of Ormiston J in F.C. of T. v Klan...''
30. The Tribunal was able to distinguish Studdert (supra) on the basis that (i) Mr Studdert was seeking preferment to a higher position with the same employer; (ii) there was a finding in that case of a ``dual purpose'' (i.e. future promotion and the intention to gain greater efficiency in his existing occupation) absent in the case before the Tribunal.
31. It may well be that notwithstanding the difference in the fact findings between this case and the above decision, applying the ratio of that case should nevertheless result in a finding in favour of the Commissioner in the absence of any evidence that the taxpayer incurred the impugned expenditure for a dual purpose, one of which was to utilise the resultant skills in her existing occupation. However, albeit with greater hesitation since reading the decision in Case 44/93
(ST93/11), I have nevertheless concluded that the evidence of Mr Morrison, as summarised in para 26 above, satisfies the evidentiary onus on it being demonstrated that the applicant's training to obtain her licence increased her efficiency in her existing occupation; hence the mere failure to attest on oath that improved efficiency was one of the motives in incurring the expenditure is not fatal to the claim. If I am wrong in this, no doubt I will be corrected on appeal. Counsel for the applicant took a calculated risk in not calling his client and may have to live with the consequences which flow from that decision.
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