Case L28
Judges:HP Stevens Ch
CF Fairleigh QC
JR Harrowell M
Court:
No. 1 Board of Review
H.P. Stevens (Chairman); C.F. Fairleigh Q.C. and J.R. Harrowell (Members): In his return of income for the year ended 30 June 1972 the taxpayer claimed a deduction of $1,356 for air fares upon travelling overseas and for expenditure on accommodation whilst overseas. The Commissioner adjusted the income as returned by disallowing the deduction and an assessment issued accordingly. The taxpayer objected thereto and the Commissioner decided to disallow the objection. That decision was referred to a Board for review. By reason of circumstances not presently relevant the Board has before it a notice of amended assessment.
2. The return of income for the year in issue is on Form B, Business and Professional. The only income of that year which need be mentioned is an amount of $204 received from a University in Australia where the taxpayer was employed as a tutor giving seminars and marking essays.
3. After obtaining a primary degree the taxpayer in 1966 began the university courses required as a preliminary to read for a master's degree; and in 1968 he was enrolled as a candidate for the master's degree. Late in 1969 the University granted him the privilege of enrolment as a candidate for the degree of Ph.D., without first attaining a master's degree. In the meantime he was offered and accepted the aforesaid position of tutor.
4. Earlier in his life the taxpayer had been able to make several visits to countries of a particular culture and had acquired considerable basic knowledge of this subject, before he received formal academic training pertinent thereto.
5. The taxation return for the year in issue contains statements to the following effect:
``In the light of his work as a tutor and of his then more recent specialized studies, the professor heading the department as well as the supervisor of his work for his Doctor's degree strongly counselled and encouraged him to expand and perfect his knowledge by making a special study tour of certain countries with a view to his being progressively given more senior relevant academic appointments in his career.
The taxpayer therefore and thereupon arranged to make this study tour extending for some five months.
For approximately one-third of this study tour he was accompanied by and studied and researched with his supervisor on manuscripts only available in two overseas countries; and there also he worked with his supervisor on a scholarly book concerning a segment of the history of one of those two countries. The book has been published in abridged form and is now in process of publication in a full edition.
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In the course of this tour he gained much further specialized knowledge of his subjects and practice in speaking and reading vernacular and other languages with which his work is concerned.''
6. So far as is presently material, the notice of objection merely states that from the adjustment sheet it is noted that the Commissioner has disallowed as capital expenditure, the claim the taxpayer made for the deduction of expenses of $1,356 incurred in the course of gaining or producing his assessable income.
7. It is clear that the expenditure was not capital nor of a capital nature. In
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at pp. 497-498 Menzies J. said:
``There has been some suggestion that to equip the taxpayer's mind in order that he may have higher earning capacity is an affair of capital... This is, I think, a misunderstanding... An outlay is of that character when it is expended to obtain what can properly be described as capital in the economic sense... it has no reference to a man's body, mind, or capacity. Section 51 does recognise that there will be outgoings incurred in gaining or producing income, or in carrying on a business to do so, that are of capital or of a capital nature. Expenditure of this sort is commonly made. Thus, for instance, a taxpayer who is a baker, who buys a van to deliver bread to his customers, makes such an outlay. When sec. 51 denies the deduction of an outgoing of a capital nature it directs attention to what an outlay provides rather than to the source of what is outlaid. The same is true of outlays of `a private or domestic nature'. The section, it is true, denies deductibility to `losses or outgoings of capital' and, in considering these words, attention is necessarily directed to what is outlaid or lost; they are apt to cover cases where nothing is gained but where part of the taxpayer's capital is lost or paid away. Thus the destruction of the baker's delivery van would provide an instance of capital loss...''
8. Although expressed with respect to payments made or received in performance of a promise given as part of the consideration for the acquisition of a capital nature, the observation of Barwick C.J. in
Cliffs International Inc. v. F.C. of T. 79 ATC 4059 at pp. 4064-4065 has more general application, viz.: ``... the relevant quality of these payments (scil. capital or revenue) is to be determined... in relation to the gaining of the income against which they are sought to be deducted... by making the recurrent payments the appellant acquired nothing which it did not already have. The question is not of what relevant quality was the thing or right acquired by the payments: for nothing at all was acquired.''
9. What is done in the course of earning the assessable income whether of a present or future year is doubtless incidental and relevant to that end; though ``incidental'' is often given the meaning of inessential, and relevancy merely gets something into evidence.
10. The authorities are uniform that deductibility under sec. 51(1) is determined by the character (the nature/quality) of the outlay. Phrases such as ``incidental and relevant'', ``perceived connexion'', etc., are only comments unless used to mean the character (nature/quality) of a loss or outlay. The authorities are discussed in Case K45,
78 ATC 422 at pp. 424-425.
11. In Cliffs 79 ATC at p. 4064 Barwick C.J. in respect of a claimed sec. 51(1) deduction said:
``The issue... is not to be resolved by any attempt to apply... some description judicially used in a decided case in relation to the facts and circumstances of that case as the means of explaining the reasoning used in arriving at the conclusions of facts in that case.''
12. The adoption of expressions such as ``perceived connexion'', ``incidental and relevant'' as a test for deductibility pursuant to sec. 51(1) appears to be the type of error to which the Chief Justice has referred in the passage quoted in para. 11 hereof.
13. Whilst there is an observation by Dixon C.J. in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68; 12 A.T.D. 348 at p. 351 with respect to outlaying money ``in the acquisition of better knowledge'' the gravamen of the judgment is the stated conclusions of Dixon C.J. the fourth of
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which is that ``it was all done while he was... acting in accordance with the conditions of his service''. So also Kitto J. at p. 70; p. 352 said that ``in making the investigations and studies which he pursued during his period of leave (he) was acting within the scope of his office and therefore in the gaining of his salary''. In agreeing, Windeyer J. said that each case of this sort must depend on its own facts (p. 70; p. 352).14. In Cliffs at p. 4066 Gibbs J. quotes from earlier judgments the phrases ``the true legal character'' of the expenditure of what it was ``calculated to effect from a practical and business point of view''.
15. Stephen J. in Cliffs 79 ATC at pp. 4071, 4073, said that ``A bare payment of money is itself devoid of any character, either as to revenue or on capital account. It is only from surrounding circumstances that it acquires its character...'' ``The relevance of recurrence is for the light it casts upon the advantage obtained; it provides no test...''
16. A point which may be disposed of summarily is any assumed requisite relationship between the expenditure and the taxpayer's then current or future position as a tutor or lecturer at the same or any other university.
17. The taxpayer pointed out that all appointments at a university to the position of lecturer are made by the senate; and that no one, whether his supervisor or the professor heading the department, could presume to pre-empt the power of the senate to choose such lecturers as it deemed fit.
18. Thus it was not and could not be suggested that it was a condition (in the sense of a term express or implied,
E.M.I. (Australia) Ltd. v. F.C. of T. 71 ATC 4112 at p. 4118; (1971) 45 A.L.J.R. 349 at p. 353 of his employment as a tutor that he should undertake the journey and research overseas.
19. There was not any ``automatic'' increase in remuneration from the university within the principle of F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494.
20. So far as qualifying for the degree of Ph.D. by completion of the thesis is relevant as leading to a higher academic status and income, the expenditure in issue arises too soon in point of time to be deductible under sec. 51(1) (
F.C. of T. v. Maddalena 71 ATC 4161 at p. 4163; (1971) 45 A.L.J.R. 426 at p. 427).
21. The main thrust of the taxpayer's case was based on the second positive limb of sec. 51(1), i.e., that the expenditure here in issue was necessarily incurred in carrying on a business, i.e., the profession of author, for the purpose of gaining or producing an income as an author.
22. The Commissioner's answer to that contention was two-fold: first, that the taxpayer was not an author, in business as such at any material time; and secondly, that if the expenditure was so incurred, then it was incurred in relation to the gaining or production of exempt income.
23. The taxpayer did not anticipate the raising of either of those defences to the assessment (if such they may be called without inverting the onus of proof). However the taxpayer decided to proceed with his case notwithstanding the element of surprise.
24. The taxpayer contends that the first transaction is proof of the existence of a business. There are limitations to that doctrine. The clearest proposition in its favour is where a proprietary company has been incorporated with the primary object of money-lending and has considerable funds available whereupon the first transaction heralds the commencement of that business (
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061 at pp. 4067-4069; (1970) 44 A.L.J.R. 306 at p. 311). The contrary proposition is exemplified by Brown v. Brook (1971) 45 A.L.J.R. 400 at pp. 402-403 where the respondent was held not to be carrying on business as a money-lender although he had made various loans of money above the rate stipulated in the Money-Lenders Acts. Frequency of activity of the relevant kind is not synonymous with ``business'' (
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at p. 4410; (1977) 51 A.L.J.R. 831 at p. 840 per Jacobs J.). There may be no business despite the frequency; and, on the other hand, there may be a business where the activity is an isolated one (ibid.). The scale of the activities does not itself provide an answer, yet it is important evidence (ibid.); see further
Esquire Nominees Ltd. v. F.C. of T. 73 ATC 4114
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at pp. 4117, 4123 and 4128; (1973) 129 C.L.R. 177 at pp. 212, 221 and 229. In the special context of the distinction between sec. 25(1) and sec. 26(a) this subject is discussed in Case L7,79 ATC 42 at p. 48.
25. Furthermore, as was mentioned during the hearing, a considerable number of university lecturers from the beginning of their career have their sights set on being authors because of the persistence of the doctrine of ``publish or perish''. Some undertake research in the home city and elsewhere and amass notes and other material and even complete the draft of a book without being able to publish one. Such persons can make no claim to being authors for the purpose of a business under the second positive limb of sec. 51(1).
26. It is well known, and it was accepted by the taxpayer during the hearing of the reference, that whilst a candidate for a university higher degree may not submit as his thesis any work which has already been published by him, he may publish as a book or use as the genesis of a book to be published, the work which he has submitted for his thesis.
27. Although financial success from a publication is not essential for one to be in business as an author, it is a matter of some relevance.
28. The royalties payable to the present taxpayer have not made the venture a financial success for him. However a second edition with some ``improvements'' is contemplated and this is regarded by the taxpayer as likely to give a financial success to the venture.
29. The weight of the evidence on the civil standard as in
Briginshaw v. Briginshaw (1938) 60 C.L.R. 336 at pp. 360-361 is that at all material times the taxpayer was not an author, but was in the course of establishing a position which upon attainment would give him the status of an author. That objective now appears to have been attained. Yet the outlays here in issue come too soon in point of time for deductibility under sec. 51(1) (Maddalena (supra)).
30. The question whether the expenditure was incurred in the gaining of exempt income now has to be considered.
31. The taxpayer included in his return of income for the year ended 30 June 1976 a sum of $206 receivable as royalties and was assessed thereon by the Commissioner.
32. The book had been published in an overseas country in August 1975 pursuant to an agreement entered into early in 1973 in that country with a local publisher whereby copyright was vested in the publisher and royalties were payable to the authors.
33. A letter from the publisher to the taxpayer and bearing date 1 July 1976 has an attachment as to royalties and a notation ``subject to (name of overseas country) income tax''.
34. Certain political events in one of those two countries had occasioned changes to plans for the book as originally envisaged. The continuing overriding consideration of the taxpayer and his co-author was to ensure that the book would be published in the language of that country and available for sale to the multitude at a price which could be met by the ordinary worker, literate of course.
35. At one point of time it seemed probable that the book would be published by the government of that country and if this had come to pass the authors would have been paid by the government of that country.
36. Under no circumstances would these authors have been paid in the currency of that country and such royalties as were payable have not yet been remitted to Australia.
37. The taxpayer agreed that the book should be published in the name of his co-author, and he in turn waived payment of royalties.
38. During the course of his final address the Commissioner's representative said that he could give an undertaking to the taxpayer that the Commissioner would be prepared not to assess tax in any year on royalties received from the overseas country by the taxpayer where he could show, as he has at this hearing, that they have been taxed at the source.
39. The taxpayer responded to this by saying that he has not yet received any money due as royalties, because of the absolute powers of the chief Government Banking
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Authority in that overseas country and therefore he has not yet paid any tax to that country; and that he believes that the levying of tax by that country is one of government discretion dependent on such matters as whether the Australian Government levies tax on the royalties as paid.40. Whilst the position is confused due in part to the taxpayer not having had the opportunity to consider and so produce satisfactory evidence on the question of exempt income, on balance it seems that the income from royalties is exempt from tax in Australia. It is impossible to say with any assurance that the same result would follow on a more thorough investigation of that issue.
41. As the conclusions have been drawn that the expenditure here in issue does not come within the purview of either the first or the second positive limbs of sec. 51(1), the decision on the objection is to be upheld and the amended assessment is to be confirmed.
Claim disallowed
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