Case Q89

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 16 September 1983.

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K.P. Brady (Chairman),

J.E. Stewart and D.J. Trowse (Members): The question at issue in this reference is whether expenses incurred by the taxpayer in completing a Master of Science degree at an overseas university, and in returning to Australia, are allowable deductions under sec. 51(1) of the Income Tax Assessment Act as outgoings incurred in gaining his assessable income.

2. In completing his return for the year of income in issue, namely that ended 30th June 1980, the taxpayer stated his occupation as that of geologist. In giving his evidence, he stated that he joined the mining industry in 1969 as a geological draftsman. In 1976 he completed a Bachelor of Science degree after studying for it for two years on a part-time basis and for one year (the final year) on a full-time basis. In March 1977 he commenced work as a geologist with a company exploring for uranium and worked there until September 1978, when he resigned his position in order to study for a master's degree in science, which was available to him in large part because of his excellent academic record, but also because of his work experience.

3. He advised us that the manager of his employer company recommended that he do the course at London University instead of locally, because he regarded the course as taught there as particularly appropriate for a person who wished to make a career in the mining industry, in that it placed a very substantial emphasis on mineral exploration subjects, for example, geophysics.

4. It seems that in September 1978 the taxpayer left Australia for London in company with his wife, having been accepted for the course and having paid the required fees of $1,608. Upon his arrival it seems that he rented a flat some few miles from the university to which he journeyed each day by train. Towards the end period of his course, he completed his thesis and his endeavours were rewarded when he obtained his degree in October 1979. He arrived back in Australia in the following month, having purchased single return tickets for his wife and himself some few months earlier, and certainly within the year of income in issue. Shortly after his return to his home city he had interviews with two prospective employer companies, and took up employment with one of them, which we shall call X Ltd., on 2nd January 1980.

5. In preparing his 1979/80 tax return, the taxpayer claimed the following expenditures in relation to his study course as tax deductions under sec. 51(1):

                                               $
      Typing, photocopying and binding
        of thesis                             234
      University fees, 1/7/1979-
        26/9/1979                             402
      Air fare London/Australia               600
      Travelling expenses (train fares)
        in London: $14 x 12 weeks             168
      Portion of rent attributable
        to home study, $60 p.w. x 12
        weeks x 1/3                           240
      Stationery, paper, files                 25
                                            -----
                                            1,669
      Less portion claimed as a
        concessional rebate under
        sec. 159U                             250
                                           ------
      Net amount claimed                   $1,419
                                           ------
          

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ATC 456

6. The Commissioner disallowed the taxpayer's claim, and the matter has now come before us for review. The Commissioner did not dispute that $250 of the total of $1,669 was rebateable under sec. 159U but, as the taxpayer did not have rebates exceeding $1,590 (as required by sec. 159N), the amount of rebate conceded by the Commissioner was of no real benefit to him.

7. Detrimental to the taxpayer's case, we consider, is the fact that he had resigned from employment and was without personal exertion income for the full period of his overseas study. There was an understanding that he would have discussions with his erstwhile employer company upon his return to Australia, but it went no further than that. When in fact he did return to Australia, he obtained employment with another mineral exploration company, X Ltd., which was a company engaged in exploring for a wide range of minerals and thus, in the taxpayer's view, it offered excellent career opportunities. He stated that he is still employed by that company.

8. The evidence disclosed that the taxpayer was without income for the period September 1978 until December 1979, when he obtained unemployment benefits for a few weeks before commencing duties with X Ltd. We believe that the substantial break in the derivation of assessable income is fatal to the taxpayer's claim. We say this because it is basic to obtaining deductibility under sec. 51 that the expenditures be incurred in the course of gaining assessable income (
Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T (1949) 78 C.L.R. 47 at pp. 56-57). The relevant assessable income need not necessarily be earned in the year of income in which the expenditure is incurred, as is the situation now before us (
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4070); however, the degree of nexus between the expenditure and the income must be a proximate one. There must be a ``perceived connection'' between the two, to adopt the words of Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4187. In the instant case, we do not believe that there is a sufficient connection between the expenditures incurred in obtaining the higher degree and the subsequent earning of salary income.

9. The taxpayer's representative alluded to Hatchett's case (supra) as authority for the proposition that his client's expenditures in seeking improved knowledge could not properly, be categorised as capital expenditure, and so be precluded from deductibility under sec. 51. This of course is so, and the same proposition had been foreshadowed some years earlier by Dixon C.J. in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 69. But considerations of categorisation aside, Hatchett is relevant to the instant case because it deals in some depth with the matter of nexus or ``perceived connection'' between expenditure and assessable income. In giving judgment, Menzies J. was disposed to allow deduction to the taxpayer, a primary school teacher, for the cost of having his thesis typed prior to submitting it for the purpose of gaining a Teacher's Higher Certificate. The evidence established that the possession of such a certificate would not only enable the taxpayer to earn more in the future, but it forthwith enabled him to be paid more for doing the same work without any change in his grading. The learned Judge stated at p. 4186:

``The taxpayer, in reliance upon the conditions of his employment, spent money to earn more. In these circumstances the outgoings necessary to obtain the certificate ought, I think, to be regarded as outgoings incurred in gaining assessable income.''

On the other hand, he was not persuaded to grant deduction for university fees paid by Mr. Hatchett for undertaking subjects in the Faculty of Arts, finding the relationship between the outlay and the taxpayer's assessable income too problematical and remote.

10. Similarly, in the instant case, we find the connection between the taxpayer's expenditures on his study course and his subsequent salary income as an employee of X Ltd. as too problematical and remote. Unlike Mr. Hatchett, who was engaged in the very employment from which he could expect to receive additional income upon achieving the Higher Certificate, the taxpayer was without employment when studying for his higher degree. The evidence is clear that the expenditures in issue were incurred at a point

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ATC 457

in time prior to his engagement in employment, and so cannot be said to have been incurred in gaining or producing his assessable income within the judicial meaning of that expression as stated in sec. 51(1). We would also add that, whilst his intention when studying for that degree was to return to Australia and obtain more varied work than previously undertaken and so earn a higher salary than received up to that time, that intention is not sufficient to establish the necessary degree of connection between the claimed outlays and the salary income which he in fact did receive upon his return to Australia.

11. The taxpayer's representative also argued that the purpose of the taxpayer's course of study was to have him keep abreast of knowledge within his particular area of professional expertise, and so by implication sought to bring his client's matter within the fact situation which appertained in Finn's case (supra). But a material aspect of the decision in favour of the taxpayer in that case was that he was acting ``in the fulfilment of his office'' (p. 69) or was ``acting in accordance with the conditions of his service'' (p. 67). As has been earlier stated, the taxpayer was not so engaged at the time he incurred the study-course expenditures and so questions of remoteness of time and causation are relevant to his situation, but were not so in Finn.

12. Because of the conclusion that we have reached, it is not necessary for us to allude to the various components of the taxpayer's claim in any depth. However, on the evidence adduced before us, the university fees said to amount to $1,608 were paid in the previous year of income prior to the taxpayer commencing the course; we would therefore consider that the outgoing was incurred in that year. We are therefore of the view that it was not open to the taxpayer to allocate a proportion of that total outlay to that end period of study which took place in the first three months of the year of income in issue.

13. For the reasons given above, we uphold the Commissioner's decision on the objection and confirm the assessment.

Claim disallowed