Case T78
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question at issue in this application is whether the applicant should be allowed a deduction amounting to $9,921 in respect of certain expenses which may be described for the moment as self-education expenses. Essentially the expenses in question were incurred by the taxpayer in undertaking a postgraduate Bachelor of Laws degree specialising in international law at Cambridge University. The claim was made in respect of the year of income ended 30 June 1982.
2. The applicant's income tax return for the 1982 year described him as a law clerk/student. His principal source of income during that year was from his employment with a firm of solicitors for the period 1 July 1981 to 11 September 1981 wherein he derived an amount of $3,126 and also a payment in respect of unused annual leave amounting to $755. No other income was disclosed by the applicant except income by way of interest which is not relevant to this application.
3. In a schedule attached to the return the applicant gave a description of his claim in respect of a deduction for $9,921. This was made up as follows:
$
United Kingdom study costs -
Cambridge 7,446
Airfare to United Kingdom
and return 2,280
Travel insurance 195
------
TOTAL $9,921
------
4. The schedule went on to explain that the applicant was employed as a solicitor with the
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firm of solicitors until September 1981. In September 1981 he travelled to the United Kingdom to undertake a postgraduate course in international law at Cambridge University. After describing in some detail the specialist nature of the course with its emphasis on international law the schedule concluded in the following terms:``The taxpayer anticipates becoming a barrister and the course in international law will enable international trade law to be a substantial part of his practice at the Bar, in that he would be recognised as a specialist in this field.''
5. In the light of the evidence before the Tribunal it is not unfair to say that the schedule attached to the return hardly reflected the facts of the case. The reality is that the applicant was employed as a law clerk with the firm of solicitors, he not being qualified to practise as a solicitor. Furthermore, the reality is that the taxpayer had in fact been admitted to practise as a barrister in December 1980 upon graduation from the University of Queensland with a Bachelor of Laws degree. The applicant had previously graduated from the same university with a Bachelor of Arts degree.
6. Therefore before the applicant went overseas he had been admitted to practise as a barrister but had not undertaken the course of study nor served articles of clerkship necessary for admission to practise as a solicitor. Furthermore in the course of his work for the Bachelor of Laws degree at the University of Queensland he had undertaken the subjects relevant to practise as a barrister in preference to those relevant to practise as a solicitor.
7. In the course of his evidence the applicant indicated that prior to admission to the Bar he had served as an associate to judges and that his intentions were towards practising as a barrister but he regarded experience in a solicitor's office as most important, as also did he regard his experience as a judge's associate, if he were to succeed as a barrister.
8. The applicant joined the firm of solicitors as an employee in December 1980 just a few days before he was admitted to practise as a barrister. He stayed with that firm until September 1981 when he proceeded overseas to undertake the Bachelor of Laws degree at Cambridge University. The course at Cambridge University is a postgraduate course and the applicant undertook four subjects for the purpose of completing that course. The four subjects undertaken by the applicant were:
- International Sales
- Law of Peace
- Law of International Institutions
- Law of Conflict and Use of Force.
9. Exhibit B is a copy of the University of Cambridge, Faculty of Law Schedule of Subjects for 1981-1982. Included in the schedule, inter alia, are outlines of the subjects undertaken by the applicant. I have summarised these outlines as follows being conscious of the possibility that further summation of the outlines may not do justice to the content of the coursework in a particular subject:
International Sales
- Concerned with English law in relation to contracts of sale, transportation and cargo insurance.
Law of Peace
- In Australia similar courses are known as ``Public International Law''. In a sense the name of the subject is misleading.
Law of International Institutions
- Embraces creation membership, structure and operations of international organisations.
Law of Armed Conflict and Use of Force
- Embraces peace keeping, settlement of disputes on a public international law level, laws of war and armed conflict and the laws of neutrality.
10. The applicant conceded that the Law of Armed Conflict and Use of Force had little relevance to his day-to-day work as a barrister and had more relevance to his work as a reserve officer in the Australian Army. Although very little was said in the course of the hearing about this it was established that the applicant holds a commission in the Legal Corps of the Australian Army. There is no evidence before the Tribunal as to whether the applicant derives assessable income from his commission in the Army Reserve.
11. Prior to travelling overseas the applicant had discussions with a solicitor in the firm of solicitors to whom he had been responsible with a view to arranging, as best he could, for his return to employment with that firm when
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he had completed his course at Cambridge. The evidence from both the applicant and the solicitor involved was that the firm would have an interest in re-engaging the applicant as an employee in its practice when he returned from overseas. Although no undertakings were given by the firm I am satisfied that the applicant did have a reasonable assurance that he could obtain a position with the particular firm of solicitors when he returned from overseas. It is relevant to bear in mind that the applicant was not qualified to practise as a solicitor in the State of Queensland.12. In fact the applicant did not seek to resume employment with the firm of solicitors and upon his return to Australia he went straight to the Bar in private practice and has remained at the Bar in private practice since that time. The applicant was absent from Australia from mid-September 1981 until mid-October 1982 but was located in Cambridge only until June 1982. In July 1982 the applicant spent time visiting friends and relations in England and Scotland and has made no claim in respect of expenses relating to that period. August was spent in holidaying in the south of Europe and September and October were spent in travelling through the United States of America where the applicant did make a number of contacts with lawyers for the purpose of gaining an introduction to the jurisprudence of a number of the states of the United States. No claims were made by the applicant in respect of the period after he left Cambridge except in so far as he claimed the cost of his airfare travelling back to Australia. That airfare amounted to $1,312 and was made up of travel from the United Kingdom to the United States and then travel from the United States to Australia.
13. Counsel for the Commissioner took particular issue with certain of the expenses claimed in respect of Cambridge University. These expenses referred to what might be called the living expenses as opposed to the university and college fees which were incurred by the applicant for each of the three terms that he was living at Cambridge in University College.
14. These living expenses were essentially rent, cost of meals, laundry and other miscellaneous expenses incurred by the applicant in the course of his residency at University College. The respondent conceded that the other elements of the claim were allowable deductions if the Tribunal decided as a matter of principle that the claim was allowable under sec. 51 but that the living-type expenses were expenses of a private nature and therefore excluded from deductibility under sec. 51.
15. In essence then, the claim is made by the applicant for costs incurred in undertaking a postgraduate Bachelor of Laws degree at Cambridge University in a situation where the applicant already held Bachelor of Arts and Bachelor of Laws degrees from Queensland University, had been admitted to practise at the Bar and was, until the time that he left to go overseas to undertake the course at Cambridge working as a law clerk for a firm of solicitors. It is also relevant to note that the applicant had experience as an associate to judges and he had therefore already developed skills in the law before he undertook the Cambridge course.
16. I think it should be accepted as being self-evident that a person, in the position of the applicant, undertaking a postgraduate law course at Cambridge University would be a better barrister for having undertaken that course. The evidence makes it clear that the applicant was admitted to practise as a barrister before he undertook the postgraduate course. I accept that in undertaking the course he was not attempting to change his occupation and that he did not intend to seek to practise as a solicitor on his return to Australia although he did contemplate returning as an employee of the firm of solicitors. As I understood the evidence the postgraduate course did not change in any way his entitlement to practise as a barrister at the private Bar nor did it entitle him to practise as a solicitor.
17. The applicant's notice of objection claims that the amount of $9,921 represented expenses incurred in respect of self-education and relied upon subsec. 51(1) of the Income Tax Assessment Act (Document T4).
18. The amount of $9,921 is made up as follows:
University College Cambridge -- $
Fees and Domestic expenses 7,446
Airfares -- $
Australia to U.K. 956
U.K. to U.S.A. 247
U.S.A. to Australia 1,077 2,280
-----
Travel Insurance Policy 195
------
$9,921
------
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19. The amount claimed for airfares is apparently less than the amount actually incurred. Apparently the applicant did not claim the full amount expended on the U.K./U.S.A./Australia travel.
20. The payments to University College were essentially made up of three components:
- (a) fees payable for the course
- (b) college accommodation rent
- (c) payments for meals including guests and certain miscellaneous charges including linen hire, hire of a refrigerator, purchase of foodstuffs, copying charges, association fee etc.
21. The airfares claimed do not include costs incurred in travel within the U.S.A. Although the applicant makes no claim for his activities in the U.S.A. it is apparent that those activities had a real connection with his profession as a barrister.
22. The travel insurance policy was taken out for 12 months to insure against loss of baggage, personal injury, third party risk and ``everything'' to use the applicant's description in his evidence.
23. Counsel for the applicant argued that the claim was allowable under both limbs of subsec. 51(1). In relation to the second limb he argued that as the applicant had been admitted to practise as a barrister he came within the definition of ``business'' in subsec. 6(1). Counsel submitted that the applicant was carrying on business while he was employed as a law clerk by the firm of solicitors. No authorities were cited to support the submission. I reject the submission - the applicant was not carrying on a business while he was employed by the solicitors, nor was he doing so while studying at Cambridge University. No other relevant activity was carried on by the applicant during the year of income.
24. I am more attracted to counsel's next submission to the effect that the outgoings represented expenditure incidental and relevant to the earning of assessable income by the applicant. In counsel's submission, it is not to the point that the applicant ceased to derive assessable income during the period of time he was undertaking the studies at Cambridge.
25. Reliance was put upon dicta of Windeyer J. in
C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 70:
``Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling.''
26. Counsel also drew the Tribunal's attention to dicta in
F.C. of T. v. Kropp 76 ATC 4406 and
F.C. of T. v. Wilkinson 83 ATC 4295 with particular reference to the following paragraph in the judgment of G.N. Williams J. in the latter case at p. 4302 where his Honour after referring to the judgment of Helsham J. in
F.C. of T. v. White 75 ATC 4018 said:
``It is obvious that by using the phrase `direct effect on income' the learned Judge was not saying that there had to be an immediate increase in income before there could be a deduction under sec. 51. His reasoning generally recognises the principle, clearly laid down by the High Court, that the effect on income may not materialise until subsequent tax years. Also the entitlement to the deduction must be determined in the light of the circumstances in which it was incurred, and the fact that, because of the operation of the vicissitudes of life, the expected increase in income was not forthcoming does not necessarily defeat the claim (cf.
F.C. of T. v. Highfield 82 ATC 4463).''
27. Counsel for the respondent Commissioner sought to distinguish Kropp's case, which he described as an extension of the principle illustrated by Finn's case, on the basis that when Mr Kropp left the Australian firm of accountants to travel overseas he left with the intention of returning to that firm after gaining experience overseas and that the case was really one involving continuing employment. As there was no continuing employment on the facts of this application it follows that the expenses incurred do not fall within the first limb of subsec. 51(1).
28. The respondent's case also placed reliance upon the decision in
F.C. of T. v. Klan
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85 ATC 4060. In that case Ormiston J. decided that a history teacher who resigned his post in Australia to take a teaching position in the U.K. and to conduct research overseas was not entitled to a deduction for his travelling expenses. The research was conducted for the purpose of qualifying himself to undertake a postgraduate degree at an Australian university. The travelling expenses were incurred for the purpose of obtaining employment in the U.K. Mr Klan eventually succeeded in obtaining paid employment which resulted in his deriving exempt income. That case has factors in it which are not present in this case. In the course of his judgment Ormiston J. expressed the view at p. 4065 that a number of the decisions of courts in respect of so-called ``self-education expenses'' may need to be reconsidered. Of course this Tribunal is bound to apply the law as it has been interpreted by the courts and it is not appropriate that the Tribunal undertake a review which is clearly the responsibility of an appeal court. I content myself with deciding that his application is distinguishable from Klan's case because no questions concerning travelling to obtain a new position or derivation of exempt income are present in this application.29. Counsel for the respondent Commissioner also submitted in relation to the second limb of subsec. 51(1) that the applicant was not carrying on business as a barrister (or for that matter a lawyer) before he left Australia to travel to Cambridge University and it followed therefore that when the applicant returned to Australia to practise at the private Bar it was to establish a new business.
30. Counsel distinguished the facts of this application from the facts pertaining in F.C. of T. v. Highfield 82 ATC 4463 referring in particular to the following paragraph at p. 4465 where Lee J. stated:
``Counsel for the respondent has contended that the proper conclusion from the evidence is that the respondent incurred the expense in going to London for the sole purpose of acquiring additional knowledge in periodontics, so that he could do additional periodontic work in his practice and earn more income. Counsel for the respondent concedes that the conclusion is open that the respondent had in mind, in going abroad, that obtaining the degree would enable him in due course to consider practising as a specialist in periodontics, but there was no certainty as to when that might become possible, and the intention to carry on the practice as a general practice after his return has formed the foundation of counsel for the respondent's contention that the expenditure was deductible. The Commissioner, on the other hand, has contended that the respondent is not to be accepted in his assertion as to his motives for going abroad and attending the university and that the proper conclusion from all the evidence is that the respondent had made up his mind when he left for London to give up general practice and that he had decided to get the degree, acquire the necessary practical experience and then specialise in periodontics. Periodontics is a specialty in dentistry and a person registered as a periodontist is required to limit his practice to periodontics. The view which I have taken of the evidence is that the respondent in setting off to acquire the degree considered that it would enable him to do more periodontic work in his general practice, which he would carry on and expand until circumstances might be favourable for him to take up practice as a specialist.''
31. That, I would have thought, covers this applicant's case precisely except in respect of one aspect. Before the applicant went to Cambridge he had been admitted to practise as a barrister. In undertaking the degree course the applicant formed the view that it would enable him to do more work as a barrister in relation to international law and also gave evidence that the additional learning in international law assisted him in municipal law matters.
32. If, however, the applicant had undertaken the degree course at Cambridge to enable him to practise as a solicitor or, say, to get a lectureship at a university, then the case would be different.
33. Counsel for the respondent Commissioner submitted that the situation in this application is that the applicant went overseas after practising as a law clerk and returned to Australia to practise as a barrister. That submission accords with the evidence except that it ignores the fact that the applicant had been admitted to practise as a barrister before he went overseas. The applicant's explanation of the course of events makes it
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plain that he only worked as a law clerk because he wanted experience in a solicitor's office. He was equivocal as to whether he would return to Australia to work as an employee for a further period as a law clerk and as I have already described, he did have an understanding with the firm of solicitors which employed him prior to travelling overseas.34. It seems to me to make little difference to the result in this application as to whether in fact the applicant resumed his position as a law clerk on his return or took up his practise as a barrister. The result should be the same and in my view the authorities say that the result is the same. I am of the view that the expenditure incurred in relation to the course of study at Cambridge University falls within the first limb of subsec. 51(1) having been incurred in gaining the applicant's future assessable income from his practice as a barrister.
35. I rely in particular on the decision of the High Court in C. of T. v. Finn (1961) 106 C.L.R. 60 where Dixon C.J. said, at p. 64:
``For it is indeed important that officers and employees engaged at a salary in the exercise of a skilled profession should not be in a worse position in respect of the costs of better equipping or qualifying themselves in point of knowledge and skill than are those exercising the same profession as a calling remunerated in fees paid by clients or by the members of the public who, under whatever style, enlist their services. But as the legislation stands such cases cannot, unfortunately, be determined by any very broad proposition of law. For the issue must be whether the expenditure was incurred in gaining or producing the assessable income and, although the meaning and application of this phrase have been elucidated judicially, and perhaps may be further so elucidated, in the end the decision often will depend on the facts of the given case.''
and at pp. 68-69:
``When the foregoing elements are considered in conjunction, they do seem to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income. It will be noticed that in the statement of the conclusion the definite article `the' finds no place before the words `assessable income'. It is omitted because once again the suggestion appears in this case that the presence in s. 51 of the definite article means that the words `in gaining the assessable income' imply that you must look only at an intent or purpose of gaining or producing the assessable income of the current year of income. It may be remarked that the argument based on the word `the' cannot be regarded as unaffected by the use of the word `in'. For it is impossible to suppose that an expenditure directed to gaining future income cannot be allowed as a deduction unless its productive effect within the current year is seen or expected. If, therefore, the word `the' actually was read as limiting the expression that follows to assessable income of the current year, the consequence must surely be that the word `in' is to be read as importing no element whatever of purpose or motive and meaning no more than `in the course of' in a very general sense. The better view, however, is that s. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year. The matter is dealt with in
Ward & Co. v. Commissioner of Taxes [1923] A.C. 145, at p. 148, and in the case of
Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 C.L.R., at p. 309 and is alluded to in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 C.L.R., at p. 56.There remains the question whether the taxpayer's expenditure upon his journey in gaining improved and up-to-date architectural knowledge is to be considered as falling within the exception of losses or outgoings of capital or of a capital, private or domestic nature. This question should be answered by a definite negative. The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue...''
36. Kitto and Windeyer JJ. agreed with the Chief Justice. It is relevant to note that Kitto J. would have come to the same conclusion ``even if the relevance of the expenditure to the
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respondent's prospects of promotion were to be put to one side''.37. I have considered whether the airfares should be apportioned. The applicant gave evidence that he had not claimed the full amount of the U.K./U.S.A./Australia fares thereby effecting an apportionment himself. Any further apportionment would be ``de minimus'' and I need not proceed further with this aspect.
38. Different considerations apply to the travel insurance. The applicant's evidence was to the effect that this insurance was taken out for 12 months' cover to insure the applicant against loss of baggage, personal injury and third party risk. It may have also covered other risks but that is the state of the applicant's evidence. On the limited evidence available the policy could not give rise to gaining assessable income given that during the period covered by the policy the applicant had negligible assessable income. This does not appear to be a situation covered by the decision in
F.C. of T. v. D.P. Smith 81 ATC 4114. The travel insurance premium was expenditure of a private nature and not an allowable deduction within the terms of subsec. 51(1).
39. Subsection 82A(1) provides that where a deduction is allowable under sec. 51 in respect of expenses of self-education the deduction shall not be greater than the amount by which the expenses exceed $250. Expenses of self-education are defined in subsec. 82A(2) to mean expenses necessarily incurred by the taxpayer for or in connection with a prescribed course of education.
40. Prescribed course of education is defined in subsec. 82A(2) to mean a course of education provided by a school, college, university or other place of education and undertaken by the taxpayer for the purpose of gaining qualifications for use in carrying on of a profession etc.
41. While the status of University College at Cambridge was not investigated before the Tribunal I have no doubt that it is place of education and so find.
42. Counsel for the applicant sought to convince me that the course undertaken by the applicant was not a course undertaken for the purpose of gaining qualifications for use in carrying on a profession, business etc. The essence of the argument was that the Bachelor of Laws course undertaken by the applicant was not required for one to practise law although it improved one's ability to practise law.
43. That is a proposition which I do not accept. The Bachelor of Laws degree from Cambridge is a qualification for use in carrying on the profession of barrister. The sense in which qualification is used in the definition appears to be that of quality or accomplishment rather than a required condition or circumstance. That appears from the words of the statute without the need to refer to authority.
44. My attention was not directed to any authority on the interpretation of ``prescribed course of education''.
45. I have come to the conclusion that sec. 82A operates in this case. The facts are such that sec. 159N does not operate to allow a rebate under that section.
46. The Commissioner's decision on the objection will be set aside. The objection will be allowed in part by allowing a deduction of $9,476.
Claim allowed in part
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