BRIMO v FC of T

Members:
J Block SM

Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)

Decision date: 23 July 1998

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J Block (Senior Member) (a) In respect of the year ended 30 June 1994 (``the relevant year'') the Respondent, following an audit, and by notice dated 18 September 1995 issued an amended assessment against the Applicant; that amended assessment is T24 of the T Documents. The Applicant by notice dated 23 October 1995 objected against the amended assessment; that objection is T25 of the T Documents.

(b) Subsequently, and following an objection report dated 5 November 1997 (T33 of the T Documents) the Respondent, on 13 November 1997 issued a further notice of amended assessment; that amended assessment is T35 of the T Documents.

(c) Thereafter, and on 21 May 1998, the Respondent wrote to the Applicant advising him that additional deductions would be allowed in respect of motor vehicle expenses, attendance at a conference in Adelaide, depreciation of equipment and professional library, purchase of magazines, common room expenses, audio cassettes and incidentals and stationery; the last paragraph of that letter reads as follows:

``After further consideration of your position as music teacher at Cranbrook School, it is considered that your deductions for attending the Australian Opera and public theatre performances are not tax deductible. Hence your claim for opera and theatre tickets being $943 are denied as they are a private expense which have no nexus with your derived income. So too your claims for taxi fares incurred in attending the Australian Opera and public theatre performances are not tax deductible. Hence your claim for taxi fares being $100 are denied as they are a private expense which have no nexus with your derived income.''

A copy of that letter dated 21 May 1998 was copied to the Tribunal under cover of a letter dated 22 May 1998, the penultimate paragraph of which makes it clear that the matters to be resolved at the hearing were to be confined to the claims referred to in the letter dated 21 May 1998.

(d) The letters dated 21 May 1998 and 22 May 1998 did not contain any statement as to whether any penalties imposed would be in issue before the Tribunal, and in fact and at the hearing of this matter, the question of penalties was not at any stage addressed by either party.

2. The Applicant was represented by Mr Vince Perry, a tax agent, and the Respondent was represented by Ms Barbara Zakos, an officer of the Respondent. The Tribunal had before it the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act. It may be noted that the T Documents lodged with the Tribunal are in fact lengthy having regard to the numerous deductions to which they relate. The Tribunal is, however, concerned only with those T Documents which relate to the remaining deductions in issue between the parties, and as set out in the letters dated 21 May 1998 and 22 May 1998. In respect of the two remaining deductions:

• (a) the sum of $943 does indeed relate to Australian Opera and public theatre tickets; however, it also relates to certain other

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  ATC 2340

  musical performances and functions more fully described later in these Reasons;
• (b) the sum of $100 referable, according to the letter dated 22 May 1998, to taxi fares is, in fact, referable to both certain taxi fares and certain parking expenses claimed to have been incurred in attending the performances and functions referred to in paragraph (a).

3. Most of the hearing was taken up with the deductions aggregating $943 described in the letter dated 22 May 1998 as referable to Australian Opera and public theatre tickets. Those deductions, which make up the aggregate sum of $943, are referred to collectively as the ``musical cost deductions'' (and the objection decision in respect thereof is referred to as the ``Musical cost objection decision''), while the deductions aggregating $100 in respect of taxi fares and parking expenses (referable to the musical cost deductions) are referred to collectively as the ``travel cost deductions'' (and the objection decision in respect thereof is referred to as the ``travel cost objection decision'').

4. The musical cost deductions consist of the following specific items:

• (a) a concert subscription series (the Annual Philips Mozart Master Series) for the calendar year 1994; the programs referable to the concerts in the series indicate that, in broad terms, each concert program involved a concerto (sometimes but not always a piano concerto) and an orchestral work; the amount paid in January 1994 for the concert series was $443;
• (b) performances of the operas ``Hansel and Gretel'' and ``Orpheus and Eurydice'';
• (c) a performance by the Brodsky Quartet;
• (d) performances of the musicals ``M. Butterfly'' and ``Phantom of the Opera'';
• (e) a performance of ``Flamenco Fire'', a dance performance accompanied by flamenco music;
• (f) two piano recitals;
• (g) the Ascham School Jazz Concert;
• (h) an attendance at the Dackow Clinic, a seminar illustrating conducting techniques;
• (i) a subscription to the Inaugural Governors Ballroom Series of Cranbrook School, and which involved musical items.

5. (a) In respect of the concert series referred to in clause 4(a), the Applicant was faced with a substantiation difficulty. The relevant payment was, as set out previously, made in January 1994, and in respect of concerts for the whole of the calendar year 1994. No claim was made in respect of or substantiated for any concerts for the period July to December 1993.

(b) Mr Perry argued that the Tribunal should, in accordance with some concept of accrual accounting, assume that the Applicant made a similar payment in January 1993 for the 1993 calendar year. There is no basis upon which the Tribunal is entitled to make any such assumption. Although there was no separate allocation of the aggregate cost of the concerts to the individual concerts, extending over the 1994 calendar year, the Tribunal considers that it is fair and reasonable to allocate one half of the aggregate cost of the concerts ie $221.50 to the relevant year and in other words to the period January to June 1994.

6. (a) The Applicant was, during the relevant year, a music teacher at Cranbrook School, a private school in the eastern suburbs of Sydney. He was one of a small number of music teachers at the school; he taught both in the primary school and in the high school. His duties involved, amongst other things, giving piano lessons, conducting the school orchestra and various other musical activities. The T Documents include (at pages 116 and 117) a letter addressed to the Applicant dated 9 December 1992 by the school's Director of Music which lists his duties for 1993. His duties were similar in 1994. That letter is set out in these Reasons as follows:

``Further to our conversations yesterday and on Monday and my subsequent discussions with the Headmaster concerning your status in the Music Department I am pleased to put to you the following proposed list of duties for 1993:

• 1. Continue and expand the individual piano tuition that you currently have in the Junior and Senior Schools including taking on six students entering Year 3 from the Prep. School next year. This could include members of the general public. (11 hours +)
• 2. Take over some additional individual piano tuition in the Prep. School, possibly up to or exceeding 8 students,

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  ATC 2341

  depending on agreement from parents and students. (4 hours?)
• 3. Establish, co-ordinate and teach a program of group keyboard tuition for beginner students in the Junior and Senior Schools in groups of up to 8 in the Keyboard Laboratory. (hours dependent on demand, estimate 2 hours +)
• 4. Co-ordinate and teach supplementary classes in aural training for AMEB and Trinity College exam candidates... (1 hour)
• 5. Establish, co-ordinate and teach a program of supplementary classes in AMEB Musicianship for Cranbrook AMEB and Trinity College practical exam candidates and members of the general public. (hours dependent on demand)
• 6. Teach a supplementary course of keyboard lab. classes for advanced students from the Year 7 and 8 non- elective classes during their timetabled non-elective music periods. I see this as being a vital element in the process of recruitment into the elective music program. (4 × 45m. periods = 3 hours)
• 7. Co-ordinate the tutorial program for the Junior School Orchestra and, at the discretion of the Director of Music, conduct rehearsals and performances. (1hr 30 mins)
• 8. Act as liaison officer between the Music Department and the Junior School on matters affecting the daily running of both departments; excursions, rehearsals, lesson times etc.
• 9. Act as Concerts Officer to co-ordinate the logistics of times, venues, notification of staff, publicity, catering, equipment and finance for all performances presented under the aegis of the Music Department.

The above list would involve you in upwards of 23 hours face to face teaching per week plus additional administrative duties. Items 1 to 5 would be on a fee paying basis. In all of these duties you will be responsible to the Headmaster via the Director of Music.

I would like to take this opportunity to thank you for your contribution to the development of music in the school to date, particularly since my commencement in 1991. I trust that you will find your new duties challenging and fulfilling and I look forward to an exciting year of music making in 1993.''

The Applicant said (Transcript page 7) that in fact and in the result he took more general music classes than had been envisaged in the letter dated 9 December 1992.

(b) The Applicant was the only person who gave oral evidence and that at some length. The Tribunal is prepared to accept that by and large, and allowing for some degree of exaggeration, the Applicant's evidence was acceptable. He said, amongst other things, that Cranbrook is a private school catering for the most part to privileged boys, who would be likely to attend some of the musical events previously referred to and that it was necessary for him, for the purpose of performing his duties, to be familiar with and indeed to attend a broad range of musical events.

(c) In relation to the concert series and certain of the other musical events referred to, the Applicant's lengthy and detailed description of them, in support of his objection, did at times indicate a degree of ingenuousness; there are for example events which are referred to as ``a rare treat'' (see pages 118 and 119 of the T Documents). In respect of the Brahms No. 1 Concerto, he said at page 120:

``A chance to hear one of the great piano concertos. Brahms treats the piano here more orchestrally than most. A bold first concerto by the great master.''

There are illustrative passages of a similar nature in relation to other musical events.

(d) The Applicant said that whenever a piano concerto was to be performed, or the attendance involved a piano recital, he would attempt to sit on the left hand side of the concert hall, in order to ensure that he could watch the pianist's hands.

(e) The Tribunal finds that the Applicant is an enthusiastic person, and who was, during the relevant year, in all probability an effective music teacher. More particularly, it is likely in the view of the Tribunal that he was, in the relevant year, a music teacher of the kind who could imbue his pupils with some of his knowledge of, and enthusiasm for, music.

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ATC 2342

7. (a) It is convenient at this juncture to consider the legal aspects of deductibility of expenditure of this kind (often referred to as self-education expenditure) under section 51(1) of the Income Tax Assessment Act 1936 which provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions 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.''

(b) The decision of Hill J in
FC of T v Studdert 91 ATC 5006 put to rest, once and for all, a previously held view that self-education expenses are deductible only if it could be shown that it would contribute, or would be likely to contribute, to increased income, and whether in consequence of promotion or otherwise. In Studdert's case, Hill J made it clear at pages 5013 and 5014 that this is not the case; see in particular the following passage from his judgment (and in respect of which emphasis has been added by the Tribunal) as follows:

``To fall within s 51(1) it is not necessary to show that a particular outgoing will, on the balance of probabilities, produce an increase in assessable income in the future . So much was decided by the High Court in
FC of T v Smith 81 ATC 4114; (1980-1981) 147 CLR 578, where the payment of a premium by an employee on a loss of income policy was held deductible, irrespective of the fact that no income might ever be derived under the policy, and indeed, where presumably the employee might have desired that no income be derived under the policy. See too FC of T v Cooper (supra) at ATC 4412; FCR 197. As I said in the latter case, the true principle is that enshrined in the famous passage from the decision of the High Court in
Ronpibon Tin NL v FC of T (1949) 8 ATD 431 at 436; (1949) 78 CLR 47 at 57:

`In brief substance, to come within the initial part of the subsection 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.'

In its reformulated form in later cases, eg Smith, the principle has been expressed as follows [at ATC 4117; CLR 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.'

Where an outgoing is shown to contribute or to be likely to contribute to increased income, it will normally be the case that the necessary connection will exist between the outgoing and the activities of the taxpayer which more directly contribute to the gaining or production of assessable income. Cooper is perhaps, on one view, an illustration of an exception to this general rule. However, it is not necessary for an outgoing to be deductible that a taxpayer be able to show a likelihood of increased income. In the present context, were this to be so, it would mean that a person who had reached the peak of his income-producing position, would never be entitled to a deduction for self-education expenses . Thus, the Commissioner of Taxation, having no public service office to which he could ordinarily expect to be promoted, could never obtain a deduction for a course of instruction that could be shown to better equip him in the performance of his duties as Commissioner. So to state the problem is to expose the fallacy in the argument. If the Commissioner were to undertake a course which would be objectively seen as improving or tending to improve his proficiency in his office, that would better equip him so to do, there is no reason to suppose that a deduction would not be allowable for expenditure which he incurred on such a course.''

It is clear, having regard to the decision in Studdert's case, that the Applicant need not show any connection or anticipated connection between the musical cost deductions and promotion or increased income.

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ATC 2343

(c) In
FC of T v Finn (1960) 12 ATD 348; (1961) 106 CLR 60, the High Court dealt with the case of an employed senior design architect who claimed the costs incurred by him in respect of activities abroad devoted to architecture and its study. In the following quoted passages emphasis has also been added by the Tribunal. The deduction was allowed; at ATD pages 351-352; CLR pages 68 and 69 Dixon CJ said:

``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. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, though sometimes in vain. Had he dwelt nearer to the sources of such knowledge and information he doubtless would have visited them from time to time in his career. As it was he had been able to do so only once before and in the meantime had depended on literature. It is simply a false analogy to treat him in his visit abroad as engaged in the equivalent of the acquisition of something of an enduring nature and therefore capital. You cannot treat an improvement of knowledge in a professional man as the equivalent of the extension of plant in a factory. Unfortunately, skill and knowledge of most arts and sciences are not permanent possessions; they fade and become useless unless the art or the science is constantly pursued or, to change the metaphor, nourished and revived. They do not endure like bricks and mortar .''

(d) In the same case (Finn's case) Kitto J said at ATD page 352; CLR pages 69 and 70:

``... It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add, in the interests of the State even if also in his own interests, to his knowledge and understanding of architectural achievements and trends overseas, both in design and in construction, and of endeavours made and being made to solve architectural problems such as might from time to time confront his Government.''

(e) And, also in Finn's case, Windeyer J at ATD page 352; CLR page 70 said:

``... Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling. 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. Moreover, it would surely be wrong to assume that the Crown is so indifferent to the professional attainments of those whom it employs that their rights and prospects in its service are not affected by the true measure of those attainments. That was not so in this case. 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 .''

(f) The case of
Paramac Printing Co Pty Ltd v FC of T (1964) 13 ATD 418; (1964) 111 CLR 529 was concerned with visits to art galleries and other places of general tourist interest by certain persons. Owen J said at ATD page 422; CLR pages 537 and 538:

``... In his case, it was certainly a business trip. On the whole I think Mrs McWilliam's and Jan's journeyings should also be so regarded. They were members of the team of `creative thinkers' and to have had the opportunity of seeing for themselves what was being done overseas in the advertising and printing world would and did, I think, advance their own techniques, widen their minds and given them new ideas which would be of real benefit to them and to the business in which they were engaged.... It is not, I think, to the point to say of such persons that visiting overseas art galleries

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ATC 2344

and exhibitions, and I give this as only one example of their activities abroad, is a usual tourist activity and that the expense incurred cannot therefore be treated as a deduction for income tax purposes whether the claim for a deduction be made by the individual concerned, as in Finn's Case, or by those who employ him to use his artistic and creative abilities.''

(g) In Case B78,
70 ATC 362 Mr A.M. Donovan delivered a minority decision in which he said at 364:

``... It is probably true to say that most callings require familiarity with a body of knowledge that is constantly undergoing change and enlargement. For a qualified person to keep abreast of such developments is an incident of his occupation, and the cost of so doing is deductible. On the other hand, it is also probably true to say that knowledge in a broader sense and outside the narrow field peculiar to a taxpayer's calling also assists him in the exercise of his professional skills. In these cases, however, it will usually be found that the connection between that knowledge and the taxpayer's income producing activities is tenuous, so that it is not in any real sense an incident of his calling. In such instances, the occasion of the expense incurred in acquiring such knowledge is not found in whatever is productive of the assessable income and the cost is not comprehended by sec 51.''

It is perhaps relevant to note that while Mr Donovan was in dissent in respect of Case B78, that part of his decision appears to have been (if only implicitly) accepted by Menzies J when the matter came before the High Court in
FC of T v Hatchett 71 ATC 4184, a case in which the taxpayer succeeded in his appeal in relation to an amount of $71 paid for university fees, but was otherwise dismissed. The Tribunal considers that Mr Donovan's statement quoted above constitutes an admirable summation of the manner in which claims of this nature are to be approached.

8. Deductibility under section 51(1) of the Income Tax Assessment Act requires a sufficient nexus between the loss or outgoing and the assessable income; see in this context Dixon CJ in Finn's case, in particular at page 68. Furthermore, the ``essential character'' test enunciated by the High Court in
Kenneth Edmund Lunney v FC of T (1958) 11 ATD 404 is also used to determine whether an outgoing is a private expense. The currently accepted view is that there is no ``necessary antipathy between a loss or outgoing incurred in gaining or producing assessable income and a loss or outgoing of a private nature''
John v FC of T 89 ATC 4101 at 4108. And as Windeyer J said in Finn's case, outgoings are not private because the taxpayer gains pleasure from the activity in question.

9. (a) It might be thought (although this was not suggested in argument) that a music teacher can obtain the necessary stimulus and knowledge from listening to music on records or compact discs. Any such suggestion is answered, in my view, by a more cogent counter-argument, namely that a live performance offers a degree of immediacy and excitement, which cannot be matched or afforded by records and compact discs. It seems to me that the position of the Applicant in this case is analogous to that of the architect in Finn's case. It was not suggested that the architect in Finn's case could have acquired the knowledge in question otherwise than by visiting the sites, and for example by considering photographs, diagrams, plans or models. So it is, in my view, that a music teacher is entitled to refresh his store of musical knowledge and experience by exposure to live performances. Of course, live performance is all the more necessary where music, although a main or even predominant factor, is not the only aspect, and where (for example in opera) music and the drama are closely integrated. I accept, moreover, that the necessary nexus may be present in relation to musical performances of varying kinds.

(b) There is, in my view, a ``sufficient nexus'' between this music teacher's derivation of his income and his attendance at live music performances of varying kinds. The necessary connection for the purpose of section 51(1) of the Income Tax Assessment Act is thus present in particular in relation to the Mozart series, the two musicals, the two operas, the two piano recitals and the performance by the Brodsky Quartet; they would all have a necessary connection insofar as a music teacher carrying out the duties of the Applicant would be concerned. Ascham is the sister school of Cranbrook and it would be logical, and indeed desirable, for a teacher at Cranbrook to attend an Ascham school concert in order to ascertain

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ATC 2345

the standards of music attained at a nearby school of a not dissimilar kind. Attendance at the Dackow Clinic, in relation to his conducting skills, would also clearly be of assistance to him in this aspect of his duties. In my view then the necessary connection is present for both the Ascham concert and the Dackow Clinic. The attendance of the applicant at the series referred to in clause 4(i) was more or less obligatory for a teacher in the position of the Applicant, and here too the necessary connection is present.

(c) In respect of the Flamenco Fire dance production, the Applicant said (Transcript page 16) that his attendance was relevant to teaching World Music, Latin American Music and African Music as required by the school's Programming and Lesson Planning/Evaluation Form (T Documents page 115). I have given some consideration to this production which would, at least on the face of it, relate primarily to dance rather than to music. Although in relation to any dance performance the music may not be the prime focus, it is nevertheless to a greater or lesser degree important. One would hardly say that the music of Tchaikovsky is merely incidental to Swan Lake, since it is integral to the performance as a whole. I consider on balance that this is so also in relation to flamenco music which is integral to flamenco dance. This must always, of its very nature, be a question of fact and degree, and it will not by any means be every dance performance which would qualify for deduction on this basis. By way of example, admittedly at the other end of the spectrum, an attendance at a ballroom dancing performance would not qualify even though the performance necessarily requires music. Nor would a film qualify simply because it involves a musical score. A dance performance will qualify only where the music is sufficiently important and integral, and a flamenco dance performance appears to fall, in my view, on the right side of the line.

10. (a) In respect of all of the travel cost deductions, the Applicant failed to establish any link or connection between any taxi fares or parking expenditure claimed and any of the musical or other events referred to previously in these Reasons.

(b) The documents supplied include a copy of a receipt in an amount of $10. The Applicant gave evidence (which was not contradicted) as to the fact that this amount was expended by him when parking at the Exhibition Centre, where Cranbrook holds its annual Speech Day function, and at which musical items are performed. Although the Cranbrook Speech Day is not one of the events referred to in clause 4, this $10 parking amount has the necessary connection with the Applicant's income-earning activities and this deduction ought therefore to be allowed.

11. (a) In respect of the musical cost deductions, I have previously pointed out that in respect of the concert series $221.50 only is allowable since one half of the amount claimed relates to a period outside the relevant year. Excepting only that the amount of $943 claimed must be reduced by $221.50, the deduction in respect of musical cost deductions should be allowed, and the musical cost objection decision is, to this extent, set aside.

(b) In respect of the travel cost deductions, by contrast, $10 only is allowable, and the travel cost objection decision is to this extent, and except as aforesaid, otherwise affirmed.

(c) As set out previously in these Reasons, no argument of any nature was addressed to me in respect of penalty, and the letters of 21 and 22 May 1998 could reasonably be construed so as to suggest that the only issues to be decided by the Tribunal would be the two objection decisions. In the circumstances, I do not think it appropriate for me to make any finding as to the penalty and interest components of the most recent amended assessment.

(d) In summary, the Respondent is directed to amend the further amended assessment, so as to allow a deduction of $10 in respect of travelling cost deductions and to allow $721.50 in respect of the musical cost deductions. Accordingly:

• (1) the musical cost objection decision is set aside, excepting only to the extent of $221.50, in respect of which it is affirmed;
• (2) the travel cost objection decision is affirmed excepting only to the extent of $10, in respect of which it is set aside;
• (3) the Tribunal makes no finding as to the penalty and interest components of the most recent amended assessment.