TOBIAS v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 May 1998

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BH Pascoe (Senior Member)

This is an application to review a decision of the respondent to disallow the applicant's objection to an assessment of income tax based on income of the year ended 30 June 1995. The applicant, Ms Tobias, claimed a deduction for $15,322 as self-education expenses pursuant to section 51 of the Income Tax Assessment Act 1936 (``the Act'').

2. At the hearing the applicant was represented by Mr Baring, a solicitor, and the respondent by an officer of the respondent. The parties provided to the Tribunal a statement of agreed facts and no further evidence was submitted.

3. The facts of this matter, as set out in the statement of agreed facts, were:

``1. In January, 1993 the Applicant took a position as a casual employee at Fast Eddies Restaurant in Melbourne (`Fast Eddies').

2. At the time the Applicant took the position the Applicant was enrolled in a Bachelor of Commerce Degree at Monash University.

3. In June, 1993 the Applicant discontinued her Bachelor of Commerce Course and took a full time position at Fast Eddies as Restaurant Manager.

4. The Applicant decided to pursue a career in the hospitality industry and enrolled in a hotel management course (`the Course') at the Blue Mountains International Hotel Management School (`the School') in November 1993. The Applicant ceased work at Fast Eddies prior to commencing at the School.

5. The Course curriculum was dividend [sic] into five semesters and provided that for the:

• (a) first semester (February, 1994 to June, 1994) the Applicant would undertake academic study at the School's premises;

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• (b) second semester (July, 1994 to December, 1994) the Applicant would undertake a practical placement at an approved resort;
• (c) third semester (February, 1995 to June, 1995) the Applicant would undertake academic [study] at the School's premises;
• (d) fourth semester (July, 1995 to December, 1995) the Applicant would undertake a practical placement at an approved resort;
• (e) fifth semester (February, 1996 to June, 1996) the Applicant would complete her final academic studies at the School's premises.

6. The School assists the students to obtain employment with resorts that satisfy the requirements of the Course curriculum.

7. During the first semester the Applicant did not derive income from any sources at all.

8. The School assisted the Applicant's practical placement for the second semester with the Proprietor of the `Ayers Rock Resort' at Ayers Rock in the Northern Territory. The Applicant derived income of $15,262.00 from such employment.

9. In November, 1994 the School levied the Applicant with an invoice for $15,322.00 being an amount for tuition and other Course related fees for the 1995 school year (`the 1994/95 Expenses').

10. In December, 1994 whilst the Applicant was still undertaking her practical placement at the Ayers Rock Resort, the Applicant paid the 1994/95 Expenses.

11. The School assisted the Applicant's practical placement for the fourth semester with the proprietor of the `Ramada Palm Cove' at Palm Cove in Queensland. The Applicant derived income of $12,679.00 from such employment.

12. In November, 1995 the School levied the Applicant with an invoice for $16,002.21 being an amount for tuition and other Course related fees for the 1996 school year (`the 1996/96 [sic] Expenses').

13. In December, 1995 whilst the Applicant was still undertaking her practical placement at the Ramada Palm Cove resort, the Applicant paid the 1995/96 Expenses.

14. The Applicant became eligible and received $3,172.00 of Austudy payments for the Fifth Semester.

15. The Applicant finished the Fifth Semester, graduated and in July 1996 obtained a position as Hotel manager with Rydges in Melbourne.

16. In calculating her taxable income for the year ended 30 June, 1995 (`the 1995 year') the Applicant treated the 1994/95 expenses as expenses incurred and deductible to her under section 51 of the Income Tax Assessment Act (`the Act').

17. In calculating her taxable income for the year ended 30 June, 1996 (`the 1996 year') the Applicant treated the 1995/96 expenses as expenses incurred and deductible to her under section 51 of the Act.

18. The Respondent, in calculating the taxable income of the Applicant for the 1996 year allowed the 1996 expenses as a deduction. However in calculating the taxable income of the Applicant for the 1995 year the Respondent disallowed the 1994/95 expenses as a deduction on the basis that these expenses were not expenses incurred in gaining or producing assessable income.

19. As a consequence of the Respondent denying the Applicant a deduction for the 1994/95 Expenses the assessable income of the Applicant for the 1995 Year increased by $15,332.00.''

4. It was submitted for the applicant that the 1994/95 expenses of $15,322 were an allowable deduction under the first limb of subsection 51(1) of the Act. It was said that the applicant embarked on an income-earning activity as part of her undertaking or plan to complete the hotel management course. While it was accepted that the dominant purpose of that undertaking or plan was not to earn assessable income during the second and fourth semesters, it was argued that this did not preclude a deduction for the cost of the undertaking or plan. It was argued that the earning of assessable income was incidental to the plan and that there was a direct connection between the incurring of the expense and the derivation of assessable income from the work placement within the course. Mr Baring sought to rely on the decision of
FC of T

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v Kropp 76 ATC 4406 and to distinguish the decision in
FC of T v Maddalena 71 ATC 4161.

5. For the respondent it was submitted that the acts of the applicant in enrolling in the hotel management course should be characterised as being a means of obtaining a new position of employment with a new employer in a new area of income-earning activity. The respondent relied on the decision in Maddalena (supra) to argue that the expenditure was not incurred in gaining assessable income and not deductible under subsection 51(1) of the Act. It was said that the study involved new and very different knowledge and skills from that involved in her previous employment and was undertaken to obtain a managerial position in the hotel industry.

6. In the case of Maddalena, the taxpayer, who earned his living as an employee electrician and as a professional footballer, claimed deductions for travel and legal expenses incurred in seeking and obtaining a contract with a new and different Rugby League Club. It was held by the Full High Court that moneys spent to obtain new employment are not allowable deductions for income tax purposes. In Kropp (supra) the taxpayer, a chartered accountant, resigned from his employment with an Australian firm of accountants and went to work in Canada for two years with an affiliated but autonomous firm. He was then re-employed by the Australian firm with a promotion and increase in salary. Waddell J, in deciding that a deduction for the cost of his air fare to Canada should be allowed, said (at page 4411):

``... The expenditure was part of a plan pursued by the taxpayer to increase his income from his employment as an accountant by the acquisition of two years' overseas experience with a national firm associated with his Australian employer, at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of his salary in his remaining professional life would be accelerated. These considerations provide, to my mind, the necessary `perceived connection' between the outgoing and the assessable income so that it can be fairly be said that the outgoing was `incurred in gaining the assessable income' of future years in Australia. In reaching this conclusion I rely upon the fact that in April 1974 the taxpayer was promoted and given an increased salary only as a subsequent event confirming that the taxpayer's plan when put into action was reasonably calculated to achieve its object.''

7. It is appropriate to consider two other decisions referred to by the parties. In
FC of T v Klan 85 ATC 4060, the taxpayer was a history teacher who resigned from an Australian school and travelled to Britain to obtain a teaching post there and to undertake research towards a higher degree. He contemplated that these activities would make him a more suitable applicant for the headmastership of an independent school in Australia. He subsequently returned to Australia to a senior teaching position with a different school. In deciding that the claim for a deduction for travelling and removal expenses to Britain should not be allowed, Ormiston J, after reviewing several self-education cases, said (at page 4068):

``In the end, therefore, it is a question of characterising the acts of the taxpayer as being either incidental and relevant to operations and activities carried on for the earning of assessable income or as a means of obtaining a contract of employment with a new employer. I have little doubt that Mr Klan's plans both as originally envisaged and as carried out were directed to the latter end. They were not mere incidents to his employment.''

In
FC of T v MI Roberts 92 ATC 4787, Cooper J came to a similar conclusion in a claim by a mining engineer who was retrenched, with his consent, by his employer, enrolled with an American university to study full-time for an MBA and, before completing his studies accepted an offer of employment with another mining company. His Honour distinguished the decision in Kropp and considered the taxpayer in that case, at least analogously, fell into the general category of one who, in the language of Menzies J in
FC of T v Hatchett 71 ATC 4184 at page 4186, ``... in reliance upon the conditions of his employment, spent money to earn more''.

8. In my view, it is clear that on the authority of the cases referred to, the claim for deduction must fail to the extent that the assessable income to which the expenditure is said to be directed is the future income from employment

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in hotel management at the successful completion of the course. Mr Baring appeared to concede this but argued that the relevant assessable income was that derived during the second and fourth semesters. While it is true that the assessable income from these two placements was derived as a consequence of Ms Tobias' enrolment as a student in the course, the question is whether the fees paid were outgoings incurred in the course of gaining or producing that assessable income. In an oft- quoted decision of the High Court in
Lunney v FC of T (1957-1958) 100 CLR 478 which was concerned with cost of travel to a place of employment, Williams, Kitto and Taylor JJ in a joint judgment said (at pages 498 to 499):

``... It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.''

This ``essential character of the expenditure'' test has been adopted in several subsequent decisions of the Courts. In this case, it is appropriate to consider the essential character of the expenditure of $15,322 for tuition and other course-related fees for the 1995 school year. The essential character of this expenditure was to enable Ms Tobias to undertake the third semester of the course. In the printed material from the school, provided by the applicant and which set out an overview of the course, the section under ``Fees'' on page 23 stated:

• ``The complete course comprises five semesters.
• Three of these are study semesters for which fees are payable.
• Fees per study semester in 1993 will be:

  Tuition:          $9,380
  Residential:      $5,560
  Total:           $14,860''
            

It further provided that ``all fees must be paid 14 days before the start of each semester''. There seems no doubt that the fee of $15,322 paid in December 1994 were the fees for the third semester. It is difficult to see any nexus between the payment of those fees and the assessable income derived from the placement at Ayers Rock during the second semester. This placement was close to completion at the time at which the expense was incurred and the expense was directed solely at participating in the forthcoming academic study semester. Even if it could be said to have been expenditure as a prerequisite to obtaining a placement and earning assessable income in the fourth semester, it is not appropriate to consider it as expenditure in or in the course of gaining or producing the assessable income from that prospective employment. The essential character of the expenditure was that of enabling Ms Tobias to continue and, hopefully, complete the course to enable her to embark on a new chosen career.

9. The applicant sought some comfort in a public ruling of the respondent Taxation Ruling TR 92/8 regarding deductibility of self- education expenses. In paragraph 45 of that ruling and under the heading of ``Motor vehicle expenses'' reference is made to situations where income-earning activities are carried out at an institution such as ``students receiving AUSTUDY allowances under the SAA''. The ruling then states that the costs of journeys between the institution and the place of work are allowable if a taxpayer travels from his or her house to an educational institution and then to his or her place of work. It was suggested by the respondent's representative that it may be argued that AUSTUDY is paid to a student to assist that student to study and expenditure may be deductible. This case was distinguished on the basis that the income derived during the work placements was paid to Ms Tobias to work at such employment not to study. It is not clear whether the respondent is implying in Taxation Ruling TR 92/8 that course fees are deductible to students in receipt of AUSTUDY but this is not the case in relation to the claim before me. It is noted that Ms Tobias was allowed a deduction for the course fees paid in December 1995 and she received AUSTUDY payments for the fifth semester. The rationale of

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the deduction is not clear to me but it is not a matter which is before me and requiring any view.

10. On the basis of the foregoing, I am of the opinion that the payment of fees in December 1994 is not an allowable deduction under subsection 51(1) of the Act and the decision under review is affirmed.