Case N111

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 2 December 1981.

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K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)

The issue in this reference is whether the taxpayer, a senior investigation officer in the Australian Taxation Office, is entitled to a deduction under sec. 51(1) for the cost of attending a

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Public Practice Appreciation Course conducted by the Australian Society of Accountants in order to secure advancement to full associate membership in that Society.

2. At the hearing the taxpayer conducted his own appearance. The Commissioner was represented by one of his officers.

3. The taxpayer had obtained a Bachelor of Commerce degree majoring in accounting some years prior to the year of income in issue, which was that ended 30th June, 1979. He stated in his evidence that he sought to become an Associate of the Australian Society of Accountants in order to be continually updated in his knowledge of accounting and allied subjects, and so increase his own efficiency and thus obtain promotion and consequential salary increases.

4. It seems that since 1976 it has been required of provisional members seeking associate status in the Australian Society of Accountants to complete a professional year whereby previously acquired academic knowledge could be integrated with the practical application of that knowledge. It seems further that there were two alternatives available to the taxpayer for gaining full membership status, the Public Practice Appreciation Course (P.P.A.C.) and the Professional Orientation Programme (P.O.P.). The P.P.A.C. was slanted to meet the specific needs of participants who intended in later life to work as accountants in public practice; in fact it was a requirement of the Society that a member holding himself out to be a principal in a public practice must have attended that course. On the other hand, P.O.P. tended to have a more general content. Also, the P.P.A.C. was for a specific five day period with predetermined course content mandatory for all participants, whereas P.O.P. was structured more loosely permitting a wide choice of subjects, and depending upon when those subjects were presented, its duration could extend over some months.

5. At the relevant time, the cost of P.O.P. was $200. That amount was reimbursed in full to participating staff by the Taxation Office as part of its policy for encouraging its officers to qualify for full membership of their professional associations. Additionally, the Office granted five days leave with pay. That Office's view of the P.P.A.C., however, was somewhat different. Rightly or wrongly, it considered it to have less relevance to the duties performed by Taxation officers, and thus the degree of financial assistance given was less liberal. Reimbursement of fees was made for eight core units only, which comprised a relatively small part of the overall course. It seemed that the major reason for the reimbursement, albeit restricted, was because those units were also common to P.O.P. In addition, only unpaid leave or recreation leave was granted.

6. Despite the disparity in assistance from the Office as between the two courses, and the greater cost of the P.P.A.C. ($380), the taxpayer decided to participate in the latter course because he was of the view that its relatively short duration would be more convenient to him. Also he considered that because his duties as an investigation officer tended to involve him in dealing with public accountants to a very considerable degree, the P.P.A.C. was the more relevant study course for him to take. Stemming from that conviction and the belief that the Taxation Office's procedures for reimbursing outlays associated with the course were less than fair, he made a written submission to his employer proposing that the assistance rendered by the Office for the P.P.A.C. should be no less than that accorded to P.O.P. Upon that submission being rejected, he appealed to the Public Service Board but again his submission failed to find favour.

7. In the result, he claimed as a deduction in his return for the year ended 30th June, 1979, an amount of $340, being the cost of the course outlaid by him, $380, less reimbursement received from his employer for the cost of the core units, $40.

8. In preparing his assessment, the Commissioner allowed $90 only in terms of sec. 51(1), seemingly being of the view that the balance of $250 was rebatable as expenses of self-education under sec. 159U by virtue of the operation of sec. 82A. Accordingly, his taxable income was increased by the amount of $250 and as the taxpayer did not have concessional expenditures exceeding $1,590 (see sec. 159N), the treatment of the $250 as rebatable was of no assistance to

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him. The taxpayer quite properly pointed out that it was decided by this Board in Case M11,
80 ATC 78, that fees paid in connection with ``professional year'' courses organised by the Institute of Chartered Accountants were not ``expenses of self-education'', and therefore sec. 82A was not applicable to his situation. At the hearing, the Commissioner's representative conceded that the view taken by the Taxation Office at the time of preparing the taxpayer's assessment was incorrect, but contended in accordance with the advice contained in the reg. 35(1) statement that no part of the amount of $250 was an allowable deduction in that it was not incurred in the production of the taxpayer's assessable income. Alternatively, it was an expense of a private nature. Upon the taxpayer objecting and that objection being disallowed, the matter has come before this Board for review.

9. Whether the amount claimed by the taxpayer is deductible or not remains unaffected by considerations of recoupment from his employer, the task of the taxpayer being simply to satisfy the requirements of sec. 51(1) of the Income Tax Assessment Act. That section permits the deduction of outgoings ``incurred in gaining or producing the assessable income'', provided that they are not outgoings of a private, domestic or capital nature. One of the most helpful judicial pronouncements in applying that section to the taxpayer's situation is Helsham J.'s statement in the case of F.C. of T. v. White, which came before the Supreme Court of New South Wales in 1974 and is cited as 75 ATC 4018. There, the learned Judge, after examining the cases of
F.C. of T. v. Finn (1961) 106 C.L.R. 60 and
F.C. of T. v. Hatchett 71 ATC 4184, stated at p. 4022:

``As the result of the decision in the two cases it seems to me possible to say that expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under sec. 51 when it can be said that those studies are part and parcel of the employment, which means that the expenditure is incurred in the process of carrying out the employee's duties, or, even if they are not such, they can be seen to have a direct effect on income. Where that cannot be seen, I think it will be difficult to establish the necessary connection between the study activity and the employment so as to give study expenses the character of outgoings incurred in gaining or producing the income derived from the employment.''

He went on to state:

``It is not enough, as was said by Menzies J. in Hatchett's case, that the course of study relevant to his employment pursued by an employee should be likely to enable him the better to carry out his work and hence to obtain promotion, even if encouraged by his employer. It is not saying anything different if the situation be that without undertaking a course of study encouraged by his employer a person may not be able to improve his position in his employment.''

10. In a later case, that of
Burton v. F.C. of T., 79 ATC 4318, the presiding Judge, Smith J., again examined Finn's case (supra) and considered that an important factor causing the High Court to find in favour of the taxpayer was that he -

```was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government (his employer). His journey abroad and what he did while in Europe, as well as in South America... was therefore in a correct sense incidental to his employment, and most relevant to it'.''

11. From a study of the authorities decided over the preceding 20 years, Smith J. came to the view that when a taxpayer, being an employee, sought to obtain deduction for expenditures arising out of his employment, the issue was whether the expenditure stemmed from a condition express or implied of his employment.

12. In the instant case it was not an express condition, or even an implied condition, of the taxpayer's employment that he become a member of the Australian Society of Accountants. The evidence tendered by the Commissioner's representative is quite clear on that point. In the reply of the Assistant Commissioner to the taxpayer's submission that the P.P.A.C. should be treated no differently than the P.O.P., it was said:

``It appears that the point of your arguments is directed against what you believe to be the policy towards the Public

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Practice Course: that it is not considered relevant to the needs of the Office. This is in fact an over-simplified view of our policy. As you have pointed out, our intention has long been to encourage officers to qualify for full membership of their professional associations. Whether they actually take up and maintain such membership is, of course, a matter for their decision (emphasis added). Within the lines laid down by the Public Service Board, this recognition of the advantages of having our technical officers broadly on equal footing with professional advisers can take the form of granting leave either with or without pay and the reimbursement of compulsory tuition fees where appropriate. There has never been any intention or need for officers to closely match the qualifications of tax agents, accountants or solicitors with whom they must deal; indeed in many cases, it would be impossible to do so given the recent origin of the P.O.P. and P.P.A.C. and the resulting fact that many officers and outside accountants who are already eligible for membership of professional associations, will not undertake either course. There are also of course numbers of very effective investigation officers and auditors without any formal qualifications who could not undertake either course, but who have no difficulties in encounters with professional advisers.''

13. The taxpayer quoted from the various judgments of Finn's case (supra) in order to reinforce his arguments. However, one of the most significant dicta is that of Dixon C.J. where at p. 67 he said:

``In the fourth place, it (the study undertaken by the taxpayer) was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service.''

In the instant case, the taxpayer was not acting in accordance with the terms of his service in undertaking the P.P.A.C.; it was very much a matter of his own choice and in fact was contrary to the priority accorded to it by his employer. It is that aspect which distinguished his situation in a very material way from that of Finn's case.

14. Also the evidence adduced by the Commissioner's representative tended to run counter to the second limb of Mr. Justice Helsham's dictum enunciated in White' case (supra) that for expenses of study to be deductible they must be seen to have a direct effect on the taxpayer's income. In advising the taxpayer of the outcome of his appeal as regards obtaining a greater measure of financial assistance for P.P.A.C., the Public Service Board stated:

``The Board has determined the qualifications required for performance of duties in the taxation group of designations and these are published in the annual Gazette, `Conditions of Entry and Advancement'. Completion of study in addition to those qualifications is not essential to the work of the group or a prerequisite to promotion, and neither the Professional Orientation Programme (P.O.P.) nor P.P.A.C. course is seen as critical to the functioning of the Taxation Office.''

15. That statement was confirmed in the evidence given by the chief investigation officer who was called as a witness for the Commissioner. He stated that it was necessary for officers at the taxpayer's level to have qualifications in either accountancy, law or commerce, but completion of P.P.A.C., and indeed membership of the Australian Society of Accountants, was not a consideration taken into account in determining promotions. In answer, the taxpayer asserted that membership of the Australian Society of Accountants had enabled him to be kept abreast of developments within the accounting profession, essentially through the regular dissemination of information by the Society. As a result he was more knowledgeable in such matters than would otherwise have been the case, thus his efficiency on the job had continually improved causing him to be favourably considered for promotion.

16. However, we cannot accept that argument in its entirety. Whilst information over a wide range of subjects was doubtless obtained as an associate member of the Society, we cannot help but feel that it played a relatively minor part in establishing the taxpayer as a sound promotional prospect. The evidence showed that he had worked for some seven years in a large Taxation Office

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in capital city A before transferring in 1977 to the State Office where he currently works, and we would have considered that sort of experience as an invaluable factor in advancing his cause for promotion. Also, his own excellent deportment and facility in expressing himself, which characteristics were clearly discernible at the hearing, would also serve to earmark him as a likely contender for quick promotion. What we are suggesting is that a man's efficiency invariably stems from a multitude of contributing factors, and we would regard the taxpayer's A.A.S.A. membership as only one of such factors. The nexus between the possession of that formal qualification and his promotional prospects, and attendant increases in income, is far too tenuous for him to establish a deduction under sec. 51(1) for the cost of the study course.

17. For the reasons given above, the claim made by the taxpayer must fail. The Commissioner's decision on the objection is upheld, and the assessment before the Board is confirmed.

Claim disallowed