Federal Commissioner of Taxation v. Smith.Judges:
Supreme Court of New South Wales
Waddell J.: This appeal concerns deductions claimed by the taxpayer in his return for the year ended 30th June 1973 for tuition fees, textbooks, typing and other clerical costs, travelling expenses and certain other items of expenditure incurred in connection with his pursuit of a part-time Bachelor of Commerce course at the University of New South Wales. In making his assessment the Commissioner allowed a deduction of $400, being the maximum then prescribed as deductible for self-education expenses pursuant to sec. 82JAA of the Income Tax Assessment Act, 1936-1973 but disallowed the balance. The taxpayer lodged an objection which was referred to Taxation Board of Review No. 1 which upheld his claim to be entitled to deduct the greater part of the balance of his expenses, namely the sum of $66 for typing and clerical costs and travelling expenses and certain small amounts to be assessed by the Commissioner for depreciation. [Case H18, 76 ATC 130] The Commissioner has appealed against this decision.
The question which arises in this appeal is whether the expenditure in question incurred by the taxpayer in respect of his course of study is allowable under sec. 51 of the Act.
The taxpayer accepted appointment in the Taxation Office as a clerk (Class 1) on 10th November 1969. In October 1970 he applied for acceptance in an assessing school but was not accepted on the ground that he was not studying an approved course at tertiary level. Departmental assessing schools provided training for positions of Assessor, Grade 1 (income tax). The departmental circular dated 29th September 1971 calling for applicants for the schools specified that ``intending applicants should be currently undertaking a course of tertiary studies which, upon completion, will satisfy the qualification prescription governing advancement to positions of Assessor, Grade 4 and above''. It is clear that an applicant who had not embarked on such a tertiary course had virtually no chance of being accepted for entry to a school.
There were six grades of assessors having the following duties:
Assessor, Grade 1 - Salary earners and " Grade 2 - individuals with investment income. " Grade 3 - Business, professions and primary producers. " Grade 4 - Partnerships, trusts, estate duty, gift duty. " Grade 5 - Companies. " Grade 6 - Control of team of company assessors "Special class" companies.
As at the date of the circular mentioned the ``qualification prescription governing advancement to positions of Assessor, Grade 4 and above'' was that determined by the Public Service Board pursuant to sec. 53(1) of the Public Service Act, 1922 as requiring of the officer concerned that:
``(a) He has completed a course of training in accountancy being a course recognised by the Board as a course appropriate for the efficient discharge of the duties of the office; or
(b) he has passed in such subjects of a course in accountancy or law at a recognised educational institution as are, in the opinion of the Board, appropriate for the efficient discharge of the duties of the office; or
(c) he has other qualifications which, in the opinion of the Board, are appropriate for the efficient discharge of the duties of the office.''
In December 1971 the Public Service Board omitted Assessor, Grade 4 from the list of positions to which the determination applied
ATC 4159but the duty statement for that position and also for the position of Assessor, Grade 3, was amended to acknowledge that training in accountancy or law was highly desirable for the work involved. The determination continued to apply to appointment as Assessor, Grade 5 and beyond.
The taxpayer applied for and was accepted into the assessing school held in November 1971 and, having passed the tests involved, was appointed an Assessor, Grade 1 (Class 2/3) on 16th December 1971. At the time the taxpayer already held a Class 2/3 appointment, namely that of acting clerk in the enquiry section but his appointment as an Assessor, Grade 1 was a promotion in the sense that he was placed permanently on the Class 2/3 level and it was of advantage to his future career in that he was immediately put in a position from which, subject to satisfactory performance of duties and to the qualification requirement applying to Assessor, Grade 5 and beyond, he could move through the assessing grades with consequential increases in salary. The departmental positions held by him were as follows:
17 April 1972: Assessor, Grade 2 26 February 1973: Acting Assessor, Grade 3 16 August 1974: Acting Clerk (Class 5), Personnel 7 October 1975: Assessor, Grade 4.
In his evidence the taxpayer said that he applied for the move into the personnel section in August 1974 partly because it involved a rise in the classification of his position and partly to gain further experience. He was told at the time that, if he wanted to, he could transfer back to the assessing branch. He was, in fact, directed by the administration to take up a position of Assessor, Grade 4 in October 1975.
The duty statements of the sixth assessing grade were tendered in evidence before the Board. They emphasise the increasing complexity of the tasks required to be performed by assessors as their grade increases. The Department provides for the guidance of assessors an assessing manual which sets out in relation to specific items of income and specific claims for deduction, the answers and directions as to action to be taken in relation to any particular problem which is likely to be encountered. Nonetheless, in performing the duties of Assessor, Grade 3 in 1973 a knowledge of the basic concepts of accounting were essential. This knowledge was not imparted by the departmental course which the taxpayer undertook or to be found in the manual. Such knowledge was even more important in relation to the duties of an Assessor, Grade 4. The nature of the duties to be carried out in these two grades amply justifies the requirement mentioned above that training in accountancy or law is highly desirable for appointment to both grades. As already mentioned to be appointed to the position of Assessor, Grade 5, a person must have the qualifications mentioned above.
The taxpayer's progress through the Bachelor of Commerce degree course was as follows:
1971 Accounting Pass Economics I Fail 1972 Economics I Pass Commercial Law I Pass 1973 Quantitive Methods A Pass Accounting & Financial Management IIA Pass Quantitive Methods B Pass Accounting & Financial Management IIB Pass 1974 Economics IIA Pass Taxation Law Pass Economics IIC Fail Business Law II Pass 1975 Accounting IIIA Pass Advanced Auditing Pass
In the second semester of 1975 he sat for the papers in Accounting IIIB and Economics IIC (repeat from 1974) but the results of the examination were not known at the time of the hearing.
I turn now to the question of law involved in the appeal, namely the application of the meaning of the words ``incurred in gaining or producing the assessable income'' in sec. 51 of the Act to the facts of this case.
It was submitted for the Commissioner that the following propositions are established by the cases:
- 1. Self-education expenses of an employee are only deductible if they are ``part and parcel of the employment'', which means that the expenditure ``is incurred in the process of carrying out the employee's
ATC 4160duties''. (Per Helsham J. in
F.C. of T. v. White 75 ATC 4018 at 4022.)
- In order to qualify under this test, the taxpayer must prove one of two things:
- (a) That he was up-dating his qualifications rather than obtaining fresh qualifications (e.g.
F.C. of T. v. Finn (1961) 106 C.L.R. 60;
F.C. of T. v. Hatchett (1971) 125 C.L.R. 494; 71 ATC 4184;
Tout v. Commr. of I.R. (N.Z.) (1970) 1 A.T.R. 705.
- (b) That the necessary consequence of the self-education was an increase in salary (e.g. Hatchett First Claim).
- (a) That he was up-dating his qualifications rather than obtaining fresh qualifications (e.g.
- 2. In particular, none of the following elements is sufficient to satisfy the test:
- (a) The fact that the employer encourages the self-education (e.g.
Hatchett: F.C. of T. v. White 75 ATC 4018).
- (b) The fact that the qualification impresses the employer and thereby increases the chances of promotion.
- (c) The fact that the self-education improves the performance of the employee and thereby increases his chances of promotion (Hatchett).
- (d) The fact that the qualification is a necessary prerequisite to immediate or future promotion (White; Hatchett - and compare travelling to work cases).
- (a) The fact that the employer encourages the self-education (e.g.
It is submitted that in this case the course of study in respect of which the expenses in question were incurred did no more than make the taxpayer eligible for promotion. Completion of the course, or progress to any part of it, did not automatically bring promotion. It is further submitted that the subjects studied in general had little relevance to the taxpayer's day-to-day work. The taxpayer was not engaged in updating his qualifications but rather was obtaining fresh qualifications. Accordingly, in accordance with para. 1 of the submissions the deductions claimed are not allowable. This conclusion is not affected by the circumstance that the Department encouraged the taxpayer to pursue the course, that the completion of the early accounting subjects in the course was for the taxpayer a necessary prerequisite to promotion to the positions of Assessor, Grades 3 and 4, and the completion of a course a necessary prerequisite to promotion to Grade 5 and beyond.
In Finn's case, Dixon C.J. said, of the claim there made by a professional officer in the service of the Government of Western Australia for a deduction of the expenses of travelling in order better to fit himself to perform his work:
``It will be seen that the question involved in the case is of an important description. For it is indeed important that officers and employees engaged at a salary in the exercise of a skilled profession should not be in a worse position in respect of the costs of better equipping or qualifying themselves in point of knowledge and skill than are those exercising the same profession as a calling remunerated in fees paid by clients or by the members of the public who, under whatever style, enlist their services. 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.''
In Hatchett's case, Menzies J. held that a sum paid by the taxpayer, who was a schoolteacher, in connection with the submission of theses for the purpose of gaining a Teachers' Higher Certificate was an allowable deduction because possession of the certificate carried with it automatically a higher salary without change of status. ``The taxpayer, in reliance upon the condition of his employment, spent money to earn more'' (125 C.L.R. 498; 71 ATC 4186). On the other hand he held that university fees for subjects in the Faculty of Arts were not deductible because any relation between the assessable income of the taxpayer and the payment of such fees was problematical and remote (496; 4185). His Honour said:
``Having regard to the taxpayer's lack of success in passing university examinations it is not possible to find affirmatively that there exists any connection between the payment of university fees in 1967 and the earning of assessable income at any time in the future. The prospects of the taxpayer
ATC 4161obtaining a university degree leading to his promotion to positions in the service for which a university degree is prerequisite affords no ground for concluding that the Commissioner was in error in refusing to allow the fees paid as deductions.''
Later, his Honour said:
``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 connexion 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 has 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 connexion between the outgoing and 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 connexion 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 ((1961) 106 C.L.R. 60) and to that authority I now turn.''
In my opinion this decision does not establish that educational expenses of the kind here in question must, in order to be deductible, relate to a course of study which had as its necessary consequence an increase in salary. What Hatchett's case decides, I think, is that educational expenses which have the necessary consequence of an increase in salary are deductible and that educational expenses paid in respect of a course which, if successfully completed, makes the taxpayer likely to do a better job and therefore more likely to obtain promotion, but which the taxpayer had no real prospect of completing, are not deductible.
I think that the Commissioner is right in his second submission that the presence of any one of the elements mentioned is not of itself sufficient to establish deductibility.
However, in the present case the taxpayer does not depend on any one or any combination of these elements although each of them is present.
In the present case the relevant circumstances may be summarised by saying that the taxpayer, as an officer of the Department, decided to enter the field of assessment. The first step was to apply for acceptance in a departmental assessing school. He was able to gain acceptance only by enrolling in the Faculty of Commerce at the University of New South Wales. He passed the assessing school and was appointed an assessor. His expenditure to this point was clearly incurred in gaining the assessable income. In the circumstances in which he found himself, continuing with his course was a practical necessity to qualify himself for appointment to Grades 3 and 4. Completion of his course was essential to appointment to Grades 5 and 6. From Grade 3 onwards the accountancy and legal subjects in his course would have been either necessary or of advantage in the carrying out of his duties. The general arts topics which he would also have studied in the later years of his course were necessary only in that they would have enabled him to complete a course of training recognised by the Board as appropriate to the efficient discharge of his duties as Assessor, Grade 5 and beyond. Such other subjects should, I think, although not of direct assistance, be regarded as a desirable part of the intellectual equipment of an officer of the Department dealing with varied and difficult taxation problems. It should be inferred that the Department took this view. The appointment of the taxpayer as an assessor
ATC 4162confirmed the salary range in which he then was and, subject to his continuing his course of study and performing his duties satisfactorily, gave him a reasonably certain assurance of promotion in rank and advancement in salary. There is no suggestion that the taxpayer lacked the capacity or diligence to complete the course.
In my opinion these circumstances establish a real connection between the expenditure and the taxpayer's assessable income in the sense that the commencement of the course was reasonably calculated to lead to an increase in his income in future years for the reasons already given, that it had in fact led to the confirmation of his salary range by his appointment as Assessor, Grade 2, and his continuation with the course had, during the year of income, led to an increase in his salary namely upon his appointment as Acting Assessor, Grade 3 on 26th February 1973, and was reasonably calculated to lead to future increases, as in fact occurred. In short, in incurring the expenditures in question the taxpayer, in reliance upon the prospects of promotion which appeared reasonably to be present, spent money to earn more in the future.
For the foregoing reasons the appeal is dismissed.
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