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FC of T v ANSTIS

Judges:
Finn J
Sundberg J
Edmonds J

Court:
Full Federal Court, Melbourne

MEDIA NEUTRAL CITATION: [2009] FCAFC 154

Judgment date: 4 November 2009

Finn, Sundberg and Edmonds JJ

1. The issue in this appeal may be shortly stated: whether outgoings incurred by the respondent in the year of income ended 30 June 2006 ("the year of income") by way of "self-education expenses" were deductible from her assessable income in that year of income pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the ITAA").

2. So stated, the issue has the appearance, in the face of relevant authority, of being one of simple resolution; and that may be so. However, in the present case, the source and nature of the income in respect of which the claimed expenditure is said to have a relevant nexus that qualifies it for deductibility, belies that simplicity; at least at first blush.

Background

3. The factual background is set out at [2] - [7] of the reasons of the primary judge. It is not in dispute.

4.

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Relevantly, during the year of income, the respondent was enrolled as a full-time student undertaking a teaching degree at the Australian Catholic University. In her income tax return for the year of income, she returned $14,946 as wages income earned as a part-time sales assistant in the retail chain Katies, as well as Youth Allowance income in the sum of $3,622; and she claimed as allowable deductions outgoings totalling $920 for "self-education expenses", comprising and calculated as follows:
Travel expenses other than to university $59
Supplies for children during teaching rounds $75
Student Administration Fee $80
Depreciation - computer $692
Textbooks and stationery $264
  $1,170
Less reduction s 82A(1) $250
  $920

5. On assessment, the appellant ("the Commissioner") disallowed the deductions claimed and on application to the Administrative Appeals Tribunal ("the Tribunal") to review the decision of the Commissioner to disallow the respondent's objection to the first-mentioned disallowance, the Tribunal affirmed the decision under review.

6. The respondent subsequently appealed to this Court. The primary judge allowed the appeal and set aside the Tribunal's decision. It is from those orders that the Commissioner's appeal is brought.

Statutory framework

7. The statutory framework is set out at [8] - [14] of the primary judge's reasons.

8. Relevantly, his Honour observed:

  • "[8] Youth Allowance is a form of payment made by the Commonwealth through Centrelink, a government agency, under the Commonwealth's education assistance scheme. In order to be eligible for, and continue to receive, Youth Allowance, a person must meet certain criteria which are set out in Part 2.11 Division 1 of the Social Security Act 1991 (Cth) ("the SSA"). The payment of Youth Allowance may be suspended at the direction of the Secretary in certain circumstances, including where the relevant criteria are no longer being met.
  • [9] Section 540 of the SSA provides that, in addition to satisfying age and residency requirements;

    'a person is qualified for a youth allowance in respect of a period if…(a) throughout the period, the person satisfies the activity test. … …'

  • [10] Section 541(1)(a) states that a person satisfies the activity test if he or she satisfies the Secretary that, throughout the period, the person is undertaking full-time study. The definition of "full-time study" is contained in s 541B(1), which requires that;

    'For the purposes of this Act, a person is undertaking full time study if:

    • (a) the person:
      • (i) is enrolled in a course of education at an educational institution; or
      • (ii) was enrolled in the course and satisfies the Secretary that he or she intends, and has (since no longer being enrolled) always intended, to re enrol in the course when re enrolments in the course are next accepted; or
      • (iii) was enrolled in the course and satisfies the Secretary that he or she intends, and has (since no longer being enrolled) always intended, to enrol in another course of education (at the same or a different educational institution) when enrolments in the other course are next accepted; and
    • (b) the person:
      • (i) is undertaking in the particular study period (such as, for example, a semester) for which he or she is enrolled for the course; or
      • (ii) intends to undertake in the next study period for which he or she intends to enrol for the course;
      • either:

      • ATC 10272

        (iii) in a case to which subsection (1A) does not apply-at least three quarters of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); or
      • (iv) in a case to which subsection (1A) applies-at least two thirds of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); and
    • (c) the course in question is an approved course of education or study (see subsection (5)); and
    • (d) in the Secretary's opinion , the person is making satisfactory progress towards completing the course .' [emphasis added]

  • [11] Subsection 41(1) of the Social Security (Administration) Act 1999 (Cth) relevantly provides that;

    'a social security payment becomes payable to a person on the person's start day in relation to the social security payment.'

  • [12] Youth Allowance is assessable income pursuant to s 6-5 of the [ITAA]. Section 11-5 of the ITAA provides that educational scholarships are generally treated as exempt income within the meaning of s 6-20. However, Youth Allowance, being a Commonwealth education payment made at regular and certain intervals in a specific sum, is not exempt by virtue of ss 51-10 and 51-35. In particular, s 51-35 provides that;

    'The following payments made to or on behalf of a full time student at a school, college or university are not exempt from income tax under item 2.1A of the table in section 51 10:

    … …

    (b) a Commonwealth education or training payment …'

  • [13] A deduction from this assessable income is allowable if the expenditure is incurred in deriving the assessable income in the form of Youth Allowance. Section 8-1 of the ITAA relevantly provides that;
    • '(1) You can deduct from your assessable income any loss or outgoing to the extent that:
      • (a) it is incurred in gaining or producing your assessable income; or
      • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
    • (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
      • (a) it is a loss or outgoing of capital, or of a capital nature; or
      • (b) it is a loss or outgoing of a private or domestic nature; or
      • (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
      • (d) a provision of this Act prevents you from deducting it.'
  • [14] Subsection 82A(1) of the Income Tax Assessment Act 1936 (Cth) also provides;

    'Where a deduction is, or but for this section would be, allowable to the taxpayer under section 8-1 of the [ITAA] in respect of a year of income in respect of expenses of self-education, the deduction, or the aggregate of the deductions, so allowable to the taxpayer in respect of those expenses shall not be greater than the amount by which the net amount of expenses of self-education exceeds $250.' "

9. It was not in dispute that the principal legislative policy consideration underlying the Youth Allowance scheme was to encourage or provide an incentive to young Australians to take up courses which met the requirements of the scheme and to facilitate them in doing so.

10. On the hearing of the appeal we were referred to s 541B(3A) and (3B) of the Social Security Act 1991 (Cth) ("the SSA"), which are in the following terms:

  • "(3A) In forming an opinion about whether a person is making satisfactory progress for the purpose of paragraph (1)(d), the Secretary is to have regard to the guidelines.

  • ATC 10273

    (3B) The Minister, by legislative instrument:
    • (a) is to set guidelines for the exercise of the Secretary's discretion under subsection (3A); and
    • (b) may revoke or vary those guidelines."

11. We were also provided with a document headed Youth Allowance (Satisfactory Study Progress Guidelines) Determination 1998, which was not before the primary judge, but which relevantly provided:

" 1.4 Definitions

….

long course means a course of education the standard minimum length of which is a period longer than 1 year.

…

2.1 Long courses

  • (1) Satisfactory progress in a long course is completion of the course within a period of time comprising:
    • (a) the standard minimum length of the course; and
    • (b) an additional period for completion of 1 uncompleted subject or unit that is a part of the course.
    • Example
      • 1. If the course is a 3 year course and includes semester units, one of which has been failed, or not completed-satisfactory progress is completion in 3 years and 1 further semester; or
      • 2. If the course is a 3 year course and includes yearly units, one of which has been failed, or not completed-satisfactory progress is completion in 3 years and 1 further year.
  • (2) However, a person who, under subsection (1), is not making satisfactory progress, may, in the opinion of the Secretary, be making satisfactory progress if the person is, or has been, affected by circumstances beyond his or her control.

12. It was common ground that the course in which the respondent was enrolled during the year of income was a "long course".

The reasoning and conclusion of the primary judge

13. The primary judge commenced his analysis of the issue from fundamental principles established by long-standing authority confirmed by the High Court of Australia in more recent years. He observed that the respondent's claim is confined to the first limb of s 8-1(1), which requires the outgoing to be incurred "in the course of" gaining or producing the taxpayer's assessable income:
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56 - 57;
Federal Commissioner of Taxation v Payne 2001 ATC 4027; (2001) 202 CLR 93 at [13] - [17].

14. His Honour referred to what was said a little later in Ronpibon at 57, that "the occasion of the loss or outgoing should be found in whatever is productive of the assessable income". As was observed in the joint judgment in
Federal Commissioner of Taxation v Day 2008 ATC 20-064; (2008) 236 CLR 163 at [30]:

"That inquiry will provide a surer guide to ascertaining whether a loss or expenditure has been 'incurred in [the course of] gaining or producing … assessable income'."

15. In respect of the case before him, his Honour at [54] and [55] said:

  • "[54] [W]hat was productive of assessable income was the [respondent's] having qualified for the receipt of Youth Allowance and having preserved that qualification throughout the relevant period by satisfying the activity test. The satisfaction of that test, in turn, required her to be enrolled in a course of education at an educational institution, to be undertaking at least three-quarters of the normal amount of full-time study in respect of the relevant course for the period in question and to enable the Secretary to form the opinion that she was making satisfactory progress towards completing the course.
  • [55] In these circumstances, in my opinion, the occasion of any expenditure such as that on enrolment fees or prescribed text books which was necessary to satisfy one or other of the three requirements identified at [54] of these reasons was to be found in the applicant's receipt of assessable income in the form of Youth Allowance. …"

    ATC 10274

16. His Honour went on to distinguish the expenditure in the case before him from that considered in
Lunney and Hayley v Commissioner of Taxation (1958) 100 CLR 478 - fares paid by taxpayers in travelling from their homes to their places of employment or business and back again; and
Martin v Federal Commissioner of Taxation 84 ATC 4513; (1984) 2 FCR 260 - child care expenses.

17. His Honour was of the view that although the deductions in question in the case before him were claimed in the respondent's tax return as "self-education expenses", they were not to be characterised in the same way as similarly described expenses discussed in
Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 and
Federal Commissioner of Taxation v Hatchett 71 ATC 4184; (1971) 125 CLR 494; and distinguished cases such as
Federal Commissioner of Taxation v Smith 78 ATC 4157; (1978) 36 FLR 95 and
Federal Commissioner of Taxation v Lacelles-Smith (1978) 78 ATC 4162 because the respondent in this case had no present employment to provide the requisite connection between the claimed employment and the derivation of income.

18. His Honour concluded at [61] that unlike the travelling expenses in Lunney, the claimed expenses in the case before him were not outlaid to put the respondent in a position to receive the Youth Allowance; rather, they were incurred as a necessary incident of pursuing a particular course of study.

19. Moreover, because the expenditure by the respondent was in the same tax year as, or otherwise close in time to, the receipt of the Youth Allowance, his Honour was of the view that it could not be said to have been incurred at a "point too soon" in the sense suggested in
Federal Commissioner of Taxation v Maddalena 71 ATC 4161; (1971) 2 ATR 541 at 549.

20. Finally, his Honour at [63] made the following observation:

"Although almost all of the authorities on deductibility of educational expenses have involved an examination of the relationship between those expenses and the receipt of income from employment in the future, that relationship is not exhaustive of the ways in which fees paid to an educational institution or the cost of text books or other related expenses may be incurred in gaining or producing assessable income as required by s 8-1. The derivation of income in the form of Youth Allowance exemplifies one of the alternative ways in which the occasion of the outgoing is to be found in what is productive of the assessable income; see Ronpibon Tin (supra), at 57."

21. His Honour's observation has a resonance with the commentary of the late Professor RW Parsons in his work Income Taxation in Australia - Income, Deductibility, Tax Accounting (Law Book Co, 1985) at [8.56]:

"The discussion of the deductibility of self-education expenses has so far been confined to expenses that relate to business or employment income. In theory, at least, an expense of education may be relevant to passive income-income derived from property that is not business income. The issue will be whether the purpose of the expense, objectively determined, is to maintain and further the taxpayer's competence to invest. There is no judicial decision in which the deductibility of self-education expenses claimed to be relevant to the derivation of passive income has been considered."

22. So far as we are aware, what was said by the learned author in 1985 remains the case today.

Grounds of appeal

23. The Commissioner's notice of appeal contained four grounds, the fourth of which is in the following terms:

"The learned Judge erred in holding that the claimed deduction 'depreciation - computer' of $692.00 was deductible under s 8-1 of the ITAA. The learned Judge should have held that the amount was not deductible under s 8-1 of the ITAA and, although it was not argued before His Honour, that it was not deductible under s 40-25 of the ITAA."

24. The respondent objected to the Commissioner's reliance on this ground, because it had not been raised before the primary judge, and the issue which it raises,

ATC 10275

namely, that the claimed deduction for "depreciation - computer" ($692) falls to be determined under s 40-25, and not s 8-1, of the ITAA, was not raised in the Tribunal. Senior Counsel for the Commissioner conceded that the test for deductibility under s 40-25 is different from that under the first limb of s 8-1 and that had the respondent been aware, at the level of the Tribunal, of the Commissioner's position on the claim, she may have led evidence going to the use of the computer for a taxable purpose as defined in s 40-25(7) of the ITAA. In the words of Senior Counsel for the Commissioner:

"[I]t is difficult to say what would have happened if this information had been known or the Commissioner had made that point before. The only point I can make … is this: that the case was eventually argued as a case of agreed facts. I cannot say whether Ms Anstis would have led any other evidence … That is the problem."

25. The Court decided that it would not entertain argument on the fourth ground of appeal. Notwithstanding its decision on this aspect of the appeal, the Court hastens to observe that this should not be read as a decision on the merits of the respondent's claimed deduction "depreciation - computer" ($692) under s 40-25 of the ITAA; nor should any such inference be drawn.

Submissions on appeal

26. The respective submissions made on the appeal echoed those made before the primary judge: see [20] - [52] of the primary judge's reasons.

27. Not surprisingly, the respondent supported the judgment below and the reasoning which led the primary judge to the conclusion he reached.

28. In his written submissions, the Commissioner contended that the primary judge erred in a number of respects, as detailed in [29] - [31] below.

29. According to the Commissioner, his Honour erred in concluding as he did at [54] and [55] of his reasons - see [15] above - but it is difficult to identify from the Commissioner's written submissions the nature of the error his Honour is alleged to have made.

30. According to the Commissioner, his Honour erred in distinguishing Lunney on the basis articulated in [18] above. According to the Commissioner, this was an error because the respondent had to be enrolled and to have made satisfactory progress as a condition of her entitlement. Having done so, she became entitled to the Youth Allowance without having to do any more. In Lunney, the taxpayer had to incur the travel expenditure and having done so was then able to earn his assessable income, the amount of which did not depend on the cost of his travel. He was not paid to travel to work just as the respondent was not paid the Youth Allowance to study.

31. According to the Commissioner, his Honour erred in concluding that the various eligibility and qualifying requirements for Youth Allowance could only be satisfied by the expenditure of money and that, in consequence, the expenditure is incurred in gaining or producing the Youth Allowance within the meaning of s 8-1 of the ITAA. The basis of the alleged error is said to be that such expenditure would in any event have been incurred by the respondent in electing to undertake her course of study, irrespective of the payment of Youth Allowance. The Commissioner put the argument another way: the respondent incurred the expenditure in undertaking her studies. She undertook those studies to obtain a degree and thereby qualify to teach. She did not undertake those studies to obtain the Youth Allowance but only became entitled to payment of the Youth Allowance because she had first satisfied the requirements of s 541B(1) of the SSA.

32. It was in his oral submissions that Senior Counsel for the Commissioner endeavoured to put "flesh on the skeleton" of his argument by reference to a number of propositions which, if not repetitive, had a degree of overlap:

  • (1) The expenditure did no more than put the respondent in a position where she was able to derive assessable income;
  • (2) incurring that expenditure and undertaking that course of study merely qualified her for the receipt of income which would be paid pursuant to the social welfare policies of the Commonwealth Government;
  • (3) the expenditure in this case was not incurred in the course of producing assessable income, the assessable income being the Youth Allowance;

  • ATC 10276

    (4) what the Court said in Lunney, and what the Court said in
    Commissioner of Taxation v Cooper 91 ATC 4396; (1991) 29 FCR 177, is you have got to distinguish between expenditure which enables you to become entitled to derive assessable income; in Lunney it was expenditure which was incurred in going to work that then enabled the taxpayer there to derive his assessable income;
  • (5) the particular activity - the undertaking of the course in a particular fashion and according to a particular standard - no more than qualifies her to receive the Youth Allowance. Once she has qualified to receive the Youth Allowance she does not need to do anything more. There is no activity which actually is undertaken in the course of gaining the Youth Allowance;
  • (6) she was receiving educational assistance which facilitated her study. She was not, as such, being paid to study. Not in the sense, for example, that it may be said that the taxpayer in Finn was paid to study;
  • (7) the expenditure in this case was incurred in order to qualify to receive the Youth Allowance, just as the expenditure in Lunney for the travel to work expenses. The broad principle is that expenditure which does no more than put the taxpayer in a position to, in this case, shall we say, qualify to receive an amount of Youth Allowance is not expenditure which is incurred in the course of producing that Youth Allowance.

33. Distilling these propositions as best one can to a common denominator, one is left with the following contention: the respondent's activities as a student in fulfilling the requirements for payment of Youth Allowance were qualifying activities - qualifying oneself to earn assessable income; they were not, themselves, activities productive of assessable income; rather they were akin to the activity of travelling from home to work to put oneself in a position, as in Lunney, to earn assessable income; expenditure incurred in the course of carrying out these qualifying activities was therefore not incurred in the course of producing assessable income but at "a point too soon": Maddalena.

34. With respect, such a contention would be totally correct if the respondent's activities as a student were being characterised (as qualifying activities, and the expenditure as qualifying expenditure) by reference to income she would earn as a teacher when she qualified. But we cannot accept such a characterisation of either the activities or the expenditure by reference to the Youth Allowance income. Such a characterisation by reference to the Youth Allowance income is an exercise in semantics and must be rejected. Our reasons for being of this view are articulated below.

Analysis

35. It was conceded by the Commissioner, correctly in our view, that the Youth Allowance, in the hands of the respondent, was income at general law; as it is not carved out by the ITAA as exempt income, it is therefore assessable income of the respondent.

36. It was not suggested by the Commissioner, again correctly in our view, that the proper criteria for deductibility under the first limb of s 8-1, notwithstanding the nature and source of the income in respect of which the relevant nexus had to be established, was otherwise than that articulated in Ronpibon as recently confirmed in Payne and Day, namely, that the expenditure had to be incurred "in the course of" gaining or producing assessable income, and that a "surer guide" to ascertaining this was to inquire as to whether the occasion of the outgoing could be found in whatever was productive of assessable income.

37. The primary judge clearly adopted these principles as the starting point of his reasoning (see [13] and [14] above).

38. Where the parties parted company was on the application of these principles to the facts of the case.

39. Dealing first with the Commissioner's written submissions.

40. As to the submission at [30] above that the primary judge erred in distinguishing Lunney on the basis articulated in [18] above, it is true that the taxpayer in Lunney was not paid to travel to work, nor for that matter to travel back home. But the respondent in this case,

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contrary to the Commissioner's submission, was paid to undertake the course in which she was enrolled on condition that she did so in a particular manner - at least three-quarters of the normal amount of full-time study in respect of the course for the relevant period - and to a particular standard - to enable the Secretary to form the opinion that she was making satisfactory progress towards completing the course. We have difficulty in accepting that there is any foundation in the Commissioner's submission that the primary judge erred in distinguishing Lunney from the case before him.

41. As to the submission at [31] above, concerning the "other way" of looking at the matter, the difficulty we have with looking at the matter from this other way is that it seems to introduce a purpose test as a criterion for deductibility under the first limb of s 8-1 - the respondent undertook her studies to obtain a degree and thereby qualify to teach; she did not undertake those studies and incur the expenditure in undertaking them to obtain the Youth Allowance. That may be true, but as Gleeson CJ, Kirby and Hayne JJ pointed out in Payne at [16], the first limb of s 8-1 is concerned with whether the outgoing is incurred in the course of deriving assessable income, not whether the outgoing is incurred for the purpose of deriving assessable income:

"It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way the legislation has been interpreted."

We are unable to accept the Commissioner's submission that the primary judge erred in the approach he took on this aspect of his reasoning and, it follows, that we cannot accept the Commissioner's further submission that the respondent's expenditure cannot be distinguished from the expenditure claimed but denied in Maddalena. For the reasons expanded on below, the expenditure was not incurred prior to the commencement of the activity which was productive of the Youth Allowance income.

42. Which brings us to the Commissioner's oral submissions and, in particular, his submission at [33] above that the activities of the respondent as a student were qualifying activities and the expenditure she incurred had the same character; the expenditure qualified her to gain or produce assessable income but the expenditure was not incurred "in the course of" that gain or production. As we observed in [34] above, we have no problem with this submission by reference to the income the respondent would earn in the future once she qualified as a teacher. But by reference to the Youth Allowance income, it is an exercise in semantics. It would mean that if a person was engaged to undertake an activity (not constituting a business) on condition that he or she would only be paid if he or she carried it out in a particular manner and completed the activities within say, a month, any non-capital expenditure he or she incurred in assisting him or her to complete the activity in accordance with those conditions would not be deductible because his or her activities and the expenditure were qualifying in character and not incurred in the course of gaining or producing assessable income; in other words, the expenditure was incurred "too soon". That cannot be right.

43. It would also effectively mean that a taxpayer in the respondent's position could never incur outgoings deductible under the first limb of s 8-1 by reference to the Youth Allowance income. As a matter of legislative policy, in the absence of statutory directive, it is difficult to comprehend why this should be the case. Senior Counsel for the Commissioner valiantly endeavoured to argue that bank charges incurred on an account into which the Youth Allowance was paid might qualify, but it is difficult on the Commissioner's argument to see how they would.

44. In our view, all the expenditure in issue was incurred by the respondent in the course of undertaking her course of study for which she was enrolled as a full-time student. In the past, such activity may not have been productive of assessable income, but under the Youth Allowance scheme it will be, provided the course of study is carried out in a manner and to

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a standard which satisfies the requirements for payment of the allowance.

45. The income-producing activity so identified commenced with the enrolment of the respondent at the Australian Catholic University and continued throughout the period in respect of which the allowance was paid. There is nothing in the evidence to suggest that any part of the expenditure so claimed was incurred prior to, or as a condition of, enrolment so as, vis-á-vis the Youth Allowance income, to lack the requirement of contemporanity that comes out of Maddalena, even if it was incurred to place her in a position where she might earn assessable income in the form of her future income as a teacher analogous to the travel expenses between home and the work place incurred in Lunney.

46. So viewed, the expenditure in question was incurred in the course of gaining or producing the respondent's assessable income within the first limb of s 8-1 and this view is fortified by recourse to the test of inquiring into the occasion of the expenditure, as the High Court recently did in Day, to ascertain whether the occasion of the expenditure was productive of assessable income. In the present case, the occasion of the expenditure was the respondent's pursuance of her course of study for which she was enrolled and because of the manner and standard to which she pursued that course, it was productive of assessable income.

47. For these reasons, we are of the view that the appeal should be dismissed.


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