SUPREME COURT OF NEW ZEALAND

PLAYER v. INLAND REVENUE COMMISSIONER (NZ)

Perry, J.

30 October, 7 December 1972 - Auckland


Perry, J    : This is a Case Stated under the Land and Income Tax Act 1954 (Reprint 1971 Stats. Vol. 5). Mr Player lodged an objection to the assessment of income tax for the year ended 31 March 1971. He had claimed as a deduction from his assessable income the cost of certain fees paid by him for tuition at the Auckland Technical Institute, textbooks and examination fees but the Commissioner disallowed this. Mr Player contends that the expenditure was a deductible expense in terms of the provisions of s 111 of the Act which reads:-

   

"Expenditure or loss incurred in production of assessable income- In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it-

 

(a) Is incurred in gaining or producing the assessable income for any income year; or

 

(b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year-

 

may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred."

   and in particular in terms of s 111(a). It is agreed that s 111(b) does not apply here.

   The Commissioner contends that the expenditure is expenditure of a private or domestic nature and he is therefore, precluded from allowing it as a deduction from assessable income by virtue of s 112(1)(i) and that in any event no part of the expenditure was expenditure which was incurred by him in gaining or producing his assessable income. I set out s 112(1) and s 112(1)(i) as follows:-

   

"Notwithstanding anything to the contrary in section 111 of this Act, in calculating the assessable income derived by any person from any source, no deduction shall, except as expressly provided in this Act, be made in respect of any of the following sums or matters:"

   

"Any expenditure or loss to the extent to which it is of a private or domestic nature:"

   The Case Stated was supplemented by evidence given by Mr Player and by Mr Claire the District Commissioner of Taxes in Auckland who was called on behalf of the Commissioner (and who gave his evidence very fairly). Mr Player's evidence shows he joined the Inland Revenue Department in July 1958 and after three years transferred to the Accounts Section of that Department. While in Nelson in 1962 he commenced study for an Accountancy course. He had a discussion with the District Commissioner of Taxes in Nelson in 1965 as to whether he would like to transfer to the Inspectorate section but at that stage he declined feeling that the accounting work he was doing was beneficial to his studies. In 1966 he transferred from Nelson to Auckland and there had a discussion with the Senior Inspector (this was late in 1967) and he was again asked whether, in view of his accountancy studies, he would like to transfer to the Inspectorate. He thought the matter over and decided to accept the offer and he became an Assistant Inspector in March 1968. At that time he had passed Accounting Stages 1 and 2, Law Stage 1, Taxation, Trustee Law and Accounts, Costing and Economics. This left him with two subjects to complete his course, namely, Auditing and Law Stage 2, and these he completed in December 1970. It is the expenditure in respect of studying for these subjects that he now claims as a deduction.

   He received a letter from the Administration Officer of the Department in March 1971 reading as follows: "I am pleased to tell you that as a result of your attainment of "Associate Chartered Accountant" qualification your designation has been changed to Inspector and your grade to 017.101 from 1.12.70." and his salary was increased from 1 April 1971.

   He produced in evidence two government publications headed "Promotion Formulas-District Offices". The first was dated "1967" and the second "October 1971". In the 1967 Promotion Formula the grade of an Officer is referred to as CV up to C.1, but the later Promotion Formula uses a different form of grading from 010.102 to 017.107. Although this later one is dated October 1971 it was obviously in use at the beginning of that year as Mr Player was classified as 017.101 when he was promoted. The Promotion Formula states the minimum requirement for an Assistant Inspector as being a "Pass in Accounting II and continuing Accountancy studies." As an Assistant Inspector he could rise from C.V to C.IV after twelve months satisfactory work "provided continuing studies", from C.IV to C.III and from C.III to C.II in each case after a year if marked "8" or after two years if marked "7". Thereafter he can be promoted from C.II to C.I only by special recommendation, and this is reserved to State Services Commission. The marking "7" or "8" has reference to a mark given to each Officer on his personal report at 31 March of each year and Mr Player puts his personal reports in as evidence.

   The Promotion Formula dated October 1971 but which as I have said seems to have been in operation at an early date shows the minimum requirement for an Inspector as "Accountants Professional Examination, or a B.Com. or BCA degree with passes in (a) Advanced Financial Accounting, (b) Taxation, Trustee Law and Accounts, and (c) Auditing." Promotion seems to go as follows: 010.103-010.104, 010.104-017.101, 017.101-017.102, 017.102-017.104, 017.104-017.105, and 017.105-017.106 and promotion is on the anniversary date of the promotion to the current grade if marked "8" or better, but on completion of two years if marked "7". There is provision for final promotion in this Inspectors class from 017.106-017.107 on the "Special Recommendation provided showing outstanding ability in carrying out investigations of larger businesses with national and international ramifications." This step is reserved to the State Services Commission.

   The Promotion Formula and the evidence clearly showed that it was necessary for Mr Player to continue his studies if he were to gain promotion even as an Assistant Inspector and that while there is no specific requirement that he must succeed in his examinations nevertheless his continued service as an Assistant Inspector would be unwelcome if he did not succeed because the Department would prefer to have men willing to continue their studies and to pass them so that they in turn can gain promotion as Inspectors. It is clear also I think, that at the time we are concerned with it was necessary for Mr Player to pass his Accountancy Professional Examination or the named alternatives if he were to become an Inspector, and it is also clear that the Department recognized this and his otherwise suitability to be an Inspector by promoting him to that rank when he passed his examinations and when he was then graded 017.101. I should add that there is no question here that the course of study might not be immediately related to his work. It is obviously of that type. Mr Player also put in in evidence extracts from the Public Service Manual of Instructions which stress the value of educational qualifications. It provides for leave being granted to attend lectures to employees taking approved University degrees or the Accountancy Professional Examination but that study must be for a course or for subjects which are of direct relevance to that employee's work. There is provision for grants which are to be regarded as a reward to successful study and compensation for some of the expenses incurred in connexion with that study but no expenses such as enrolment and examination fees are to be refunded.

   I was referred to five decisions: Federal Commissioner of Taxation v. Finn (1961), 106 CLR 60; 8 AITR 60; Tout v. Inland Revenue Commissioner (NZ) (1970), 1 ATR 705 a decision of Moller, J., of this Court, Federal Commissioner of Taxation v. Hatchett (1971), 2 ATR 557 a decision of Menzies, J., in the High Court of Australia, 17 CTBR (NS) Case 103, and 17 CTBR (NS) Case 111. In Finn's Case Dixon, CJ, said: "But as the legislation stands such cases cannot, unfortunately, be determined by any very broad proposition of law. For the issue must be whether the expenditure was incurred in gaining or producing the assessable income and, although the meaning and application of this phrase have been elucidated judicially, and perhaps may be further so elucidated, in the end the decision often will depend on the facts of the given case." However I have found the decisions of assistance in shaping my approach to the issues here particularly because of the recognition by the Court of the effect of additional qualifications on the gaining of future income and with the possibility of promotion in mind. Finn's decision concerned a senior architect in the employment of the Public Works Department of Western Australia. He claimed to deduct fares, hotel and sundry expenses incurred on a visit overseas to study overseas trends in his profession. His position in the Department was such that he was at the maximum salary of his grade and could only get into a range of higher salary by promotion. A vacancy to a very senior position was pending and he hoped that his trip and study overseas would qualify him for preferment. The High Court of Australia Dixon, CJ, Kitto, J., and Windeyer, J. unanimously allowed the deduction. The decision is valuable in that it recognized that in the interpretation of s 111 the expenditure need not result in the acquisition of income in that same income year. The Australian Legislation is similar to ours.

   Tout was an officer of the Inland Revenue Department who claimed as a deduction the cost of lectures and books covering psychology and sociology which he had studied to make him better able to deal with the public. Moller, J., allowed the deduction but warned that it was a decision on somewhat special and unusual facts.

   Hatchett's Case concerned a teacher employed by the Education Department of Western Australia. He claimed to deduct expenses paid in connexion with the submission of theses for the purpose of gaining a Teacher's Higher Certificate and also University fees paid for the study of subjects in the Faculty of Arts. The Teacher's Higher Certificate enables a teacher to transfer from a lower to a higher basic salary scale and also resulted in the earning of a higher salary without a change in status. The University degree was necessary for promotion to the position of headmaster and deputy headmaster of a secondary school and study for a degree was encouraged by the Department which contributed towards the payment of fees. Menzies, J., in the High Court of Australia distinguished between the two and allowed the former. The headnote reasons as follows: "that, because the possession of a Teacher's Higher Certificate would not only enable the taxpayer to earn more in the Department in future but also forthwith entitled him to be paid more for doing the same work without a change in grade, the outgoings necessary to obtain the Certificate ought to be regarded as outgoings incurred in gaining assessable income, not being of a private nature or an outgoing of capital, so that the $89 paid in connexion with the submission of theses for the purpose of gaining a Teacher's Higher Certificate was a deduction authorized by s 51; (ii) that, having regard to the particular facts of this case, without dealing with the general question of whether the payment of university fees could ever afford a deduction from assessable income, because there was no connection between the payment of university fees and the assessable income of the taxpayer beyond that a teacher who had pursued university studies was likely to be a better teacher than if he had not done so and was therefore more likely to obtain promotion within the Department which, notwithstanding the assistance given by the Department, was not a sufficient connexion, the expenditure was of a private nature and therefore not deductible under s 51 of the Act."

   Case 103 concerned an engineer employed by an Airline company. He had risen to the position of a production planner in the maintenance workshop and had passed his matriculation examination. In February 1969 he was appointed to the position of Methods Engineer which position carried an increase in salary with annual increments and commenced a university statistics degree course in the Faculty of Commerce. This was a condition precedent to his appointment to the position of Methods Engineer and the course was one decided upon as a result of discussions with his immediate supervisor and department manager. A Board of Review allowed him to deduct his university fees and the cost of text books and there was a direct connexion between the outgoings and his assessable income.

   Case 111 concerned a Civil Engineer employed by a large public mining company. He had risen to the position of a resident engineer and was becoming more involved with administration-contract documents and the assessment of contractors' claims. He took a university course leading to a Bachelor of Commerce degree and claimed to deduct these fees and the cost of text books. He could only contend that gaining a commerce degree would help him to carry out his duties more efficiently and had to admit that it would have no significant effect on his employment nor could it be said that it would automatically lead to promotion. A Board of Review refused to allow the deduction.

   These decisions, all of a persuasive value only, show that where the expenditure can be definitely and closely related to promotion-that is to say-where the qualification is a necessary step to a defined area of promotion, then the Courts have been willing to allow it as a deductible item. But where the study merely has the effect of improving the taxpayer in his present employment, and even although it may enhance his chance of promotion, then it has not been allowed.

   Here Mr Player falls within the first class and I would follow the distinction which I have found made in the reported decisions I have cited and allow his deduction. His study is clearly related to the "Promotion Formula" which sets out the requirements of promotion. I place little importance on the Public Service Manual and would consider that if the course taken can only be justified under this and not under a Promotion Formula then it would fall under the second class and not be deductible.

   I would answer the question posed in the Case Stated by saying that the Commissioner acted incorrectly in making the assessment referred to and that he should allow as a deduction the sum of $39.80. Mr Player will be entitled to his costs and I would ask Counsel to suggest an appropriate amount.


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