Case T11
Judges:KP Brady Ch
JE Stewart M
DJ Trowse M
Court:
No. 2 Board of Review
K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)
This reference concerns the year of income ended 30 June 1978, and raises for our consideration two questions as follows:
- (a) Whether an amount of $2,002 claimed in that year in respect of self-education expenses is allowable as a deduction in terms of sec. 51(1) of the Income Tax Assessment Act 1936.
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- (b) Whether, in respect of that year, the taxpayer was liable to pay health insurance levy in terms of sec. 251S(1) of that Act.
2. The Commissioner disallowed the taxpayer's claim for a deduction of the self-education expenses and his claim not to be liable to pay the health insurance levy. Upon the disallowance of the taxpayer's objection against those disallowances, the matters have come before this Board for review.
3. At the hearing of the reference the taxpayer presented his own case. The Commissioner was represented by one of his officers.
4. During the period 1965 to 1975 inclusive, the taxpayer's occupation was said to be that of lecturer and administrator as an employee of a college administered by a State Government department. The duties of his position entailed the conduct of a fairly large number of short residential courses in each year in various aspects of agriculture and, subject to the direction of his principal, to lecture in particular subjects such as chemistry and botany. His administrative duties included the processing of applications for admission to the courses, the introduction of successful applicants to the college and, generally, to supervise their whole stay in the college which varied in length from one week to six weeks. We were given to understand that by about 1975 the taxpayer had attained the public service classification of education officer which, it seems, was the top of the then lecturer salary scale.
5. By 1975 the taxpayer's academic qualifications included a degree in agriculture, a teacher's certificate, a diploma in education administration and a master's degree in education administration. However, it appears that, at about that time, the taxpayer became concerned about his future employment and promotional prospects and with those matters in mind, and prompted by a growing interest in the general area of educational administration, he applied on his own initiative to a Canadian university for admission to a course of some 2½ years duration which would lead to his obtaining a doctorate in education administration. It also appears that, at the time, he anticipated that his then position would be available to him on his return to Australia or, if not, that a comparable position within the public service would be available to him or, failing that, that a suitable position elsewhere would be available to him because of his teaching experience and academic qualifications which would be enhanced by the obtaining of the doctorate. At all relevant times the taxpayer intended to return to live in Australia.
6. The taxpayer's application for admission to the Canadian course was successful. However, before proceeding to embark upon the course, the taxpayer entered into negotiations with his employer department concerning his leave entitlements on full pay, and the question of whether he would be granted a period of leave without pay which would enable him to complete his doctorate and return to a nominated position with the department or within the public service. It appears that, at an informal level, the taxpayer was encouraged to undertake the course but that, at the official level, he was not so encouraged. His leave entitlement enabled him to obtain full pay for one month's recreation leave and for three months' furlough. However, he was not granted leave without pay and finally, after protracted negotiations, he resigned from the public service whilst overseas in late 1976. His employer department did not undertake to (nor did it do so in fact) reimburse the taxpayer or otherwise contribute to the travelling and other expenses associated with the Canadian course.
7. The taxpayer left Australia for Canada with his wife and three children in August 1975, and immediately commenced the preparatory work associated with the obtaining of his doctorate. He successfully completed all the work and studies associated with securing it and was awarded the higher degree early in January 1978. During the period 1975 to 1978, the taxpayer maintained himself, his wife and children out of savings accumulated from his past employment, from fees earned as a lecturer in Canada and from income derived there by his wife on a part-time basis. Among the various expenses incurred by the taxpayer while in Canada were contributions to a provincial (or state) operated health scheme which provided medical and hospital cover for himself and family. We were given to understand that it was a condition of his being granted a student visa for the purposes of undertaking his studies in Canada that he would join the health scheme
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and make the requisite monthly contributions during his stay there.8. The taxpayer's wife left Canada for Scotland in September 1977. His three children followed her there in December of that year, as did the taxpayer (understood to be of Scottish extraction) at or about the same time. The taxpayer and his family arrived back in Australia in late January 1978.
9. In the meantime, however, in about December 1977, the taxpayer was interviewed in Canada by the then principal of an Australian Institute of Technology with a view to the taxpayer being appointed as a lecturer and administrator at the Institute. The taxpayer was duly appointed to the position, and he commenced to undertake the duties of the position early in February 1978.
10. In his return of income for the year ended 30 June 1978, the taxpayer made the following claims under sec. 51(1) in respect of self-education expenses incurred in connection with his undertaking the Canadian course referred to above:
$
University fees 1,070
Fares to Canada and return 1,182
-----
2,252
Less maximum rebatable amount
under sec. 159N and 159U 250
------
Net amount: $2,002
------
11. However, it emerged during the course of the hearing, and it appeared to be conceded by the taxpayer, that an amount of $117 only was paid by him in respect of fees during the year of income in issue, i.e. the year ended 30 June 1978. It seems that the balance of the fees claimed as a deduction, viz. $953, was paid before the commencement of the year in issue and that it is therefore not deductible in that year. It seems also that the cost of $1,182 for ``fares to Canada and return'' was in fact paid for the taxpayer's return airfare to Australia, presumably via Scotland. The representative of the Commissioner conceded that the amount of $1,182 was paid in the 1978 income year.
12. In his submissions in support of his claims for deductions in respect of the cost of airfares and fees, the taxpayer advised us that in the 1970s, at about the time that he embarked upon his doctorate course, there was a growing demand in Australian colleges and universitites in the area of educational administration for higher qualifications of the kind which he sought. Therefore, in the interests of safeguarding his position and perhaps enhancing his promotional prospects with his then employer department, or in the public service generally, he perceived a need to obtain his doctorate, albeit on his own initiative and at his own expense. In the longer term, and as an alternative, the taxpayer saw the higher qualification as a means by which he could extend his career opportunities beyond the public service into areas where his income-earning potential might be greater. In fact, it seems, his level of income since returning to Australia has been higher than what it might have been had he remained with his former department, or in the public service, and had not obtained his doctorate. We accept without reservation the taxpayer's contention that the Canadian course of study undertaken by him (not then available in Australia) was especially suited to his particular academic background and experience and that, in consequence of the higher qualification obtained, both the taxpayer personally and professionally and important segments of the Australian community generally have probably derived many benefits.
13. However, as correctly pointed out by the Commissioner's representative, the tests for deductibility under the first positive limb of sec. 51(1) of the Act (which limb can only be relied upon by the taxpayer because of his status as an employee), require that outgoings to be deductible must have been ``incurred in gaining or producing assessable income'' of the taxpayer, subject to the exceptions set out in sec. 51(1). The phrase cited has been the subject over the years of much judicial analysis and comment in the many similar cases which have been considered by the courts. In the recent Victorian Supreme Court case of
F.C. of T. v. Klan 85 ATC 4060. Ormiston J. examined the meaning of the phrase yet again in relation to a fact situation not unlike that now before us, and in the process his Honour explained in great detail the principles of law in connection with the application of the first limb of sec. 51(1) which emerge from the decisions of the High Court, the Federal Court and Supreme Courts of States in the various leading cases cited by him. Of particular importance for
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present purposes is his Honour's conclusion that in all cases the words of the statute must be considered and that it is dangerous to accept a gloss on those words as if they were the words of the statute itself and, further, that the perception of a connection between expenditure and the future earning of assessable income is not by itself sufficient to justify a deduction.14. In the Klan case, the taxpayer was a history teacher who resigned his teaching post in Australia and travelled to the United Kingdom where he obtained another teaching position. He also used the opportunity to carry out research in Germany and the U.K. in connection with a thesis which was required to qualify him to undertake a postgraduate degree. Mr. Klan contemplated that his overseas teaching experience, together with the higher degree, would further his career as a teacher in Australia. After a year, he returned to Australia to a position as head of a department of history at an independent school. The salary he received from this position was higher than he had previously received in either Australia or the United Kingdom. In holding that Mr. Klan's overseas travelling expenses were not deductible, Ormiston J. found that those expenses were properly characterised as outgoings which were incurred by Mr. Klan to enable him to obtain employment in new and more remunerative positions on his return to Australia. It followed, therefore, in his Honour's judgment, that as the expenses were ``moneys spent to obtain new employment'' they were not allowable deductions because they were not incurred in the course of gaining or producing assessable income.
15. Likewise, in the instant case, the university fees and return airfare to Australia which were paid in the year in issue (and before the taxpayer's return to Australia) could not be connected in any relevant way to his former government position from which he had resigned in 1976, nor to his new position which he did not take up until February 1978, following upon his return to Australia in the preceding month. Whilst it might be said that, in a real sense, the university fees were ``moneys spent to obtain new (and perhaps better) employment'', they are nevertheless not an allowable deduction because they were not, on the basis of Ormiston J.'s reasoning, incurred (directly or indirectly) in the course of gaining or producing the assessable income which the taxpayer did not begin to derive until February 1978 (see also
F.C. of T. v. Maddalena 71 ATC 4161). In any event, the fees were, in our opinion, essentially of a private nature and therefore excluded as a deduction under the excepting clause of sec. 51(1). In so far as the airfare is concerned, the decision of the High Court in the case of
Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478, is clear authority for the proposition that that expense, being the cost associated with travelling between the taxpayer's home in Canada of several years' standing and the place of his new position in Australia, was essentially of a private character and therefore not deductible under sec. 51(1).
16. We turn now to the second question arising for our consideration which concerns the taxpayer's liability to pay the health insurance levy in terms of sec. 251S(1) of the Act.
17. The taxpayer's contention that he was not liable to pay the levy, at least in whole, was based upon the proposition that he had lived for only part of the year in issue in Australia and that, in any event, he had contributed to a Canadian health scheme for himself and his family for some six months of that year.
18. Unfortunately for the taxpayer, the particular circumstances of his case, and of similar cases, were not recognised by the legislature (in the form of amending legislation) as giving rise to an anomalous position until the subsequent year of income which ended on 30 June 1979. Under the provisions of sec. 251V of Pt VIIB of the Act (in so far as is relevant for present purposes), which were operative in respect of the 1978 income year in issue, the taxpayer was not during the whole of that period a privately insured person nor was he during the whole of that period a non-resident of Australia.
19. To have gained an exemption from payment of the health levy in the 1978 income year, the taxpayer would have needed to have been a ``prescribed person'' in terms of sec. 251T, and a ``privately insured person'' for the purposes of sec. 251R of the Assessment Act, which, for the purposes of that phrase, had the same meaning as in the Health Insurance Act 1973-1976. To be a ``privately insured person'' under the latter Act, as amended by the Health Insurance Amendment Act 1976 (No. 59 of
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1976), the taxpayer was required to have been an ``eligible person'', defined as one who was an Australian resident, and, in essence, to have had basic medical and hospital cover with a private fund registered in Australia.20. Under the National Health Act 1953, to which the Health Insurance Act refers, approved funds for the purposes of that statute were essentially those which used premises within, or employed the services of a servant or agent within, a State or Territory of the Commonwealth. As already indicated, the taxpayer was a contributor to a Canadian scheme for some six months of the year in issue and was not, during that period, a ``privately insured person'' for Australian tax purposes. In any event, he was not a ``prescribed person'' within the meaning of that phrase (and therefore exempt from payment of the levy in terms of sec. 251T of the Assessment Act) for the whole of the 1978 income year as required by sec. 251V of that Act.
21. Furthermore, on the evidence, the taxpayer was a resident of Australia for, at least, five months of the year in issue and was not therefore a non-resident for the whole of that year as required by sec. 251V for the purposes of attracting exemption from payment of the levy in terms of sec. 251T. In the circumstances, the taxpayer was fully liable for payment of the levy for the whole of the year in issue in terms of sec. 251S of the Act.
22. In summary, we find on the evidence that, of the amount of $1,070 in issue in respect of university fees, the amount of $953, paid before the commencement of the year in issue, was not incurred in that year in terms of sec. 51(1) and that, in any event, neither that amount nor the amount of $117 in fact expended in that year was incurred in gaining or producing the taxpayer's assessable income. In the alternative, we are of the opinion that both amounts were outgoings of an essentially private character and were, therefore, precluded from deductibility by the exclusory clause of sec. 51(1). Similarly, in relation to the airfare of $1,182 paid for the return trip to Australia, we are of the opinion that it was not incurred in gaining or producing the taxpayer's assessable income and that, in any event, it was an outgoing of a private nature and therefore precluded as a deduction under the negative test provided by sec. 51(1). The health insurance levy was properly payable by the taxpayer for the whole of the year in issue because of his failure to meet the exemption requirements as provided by Pt VIIB of the Assessment Act.
23. For the above reasons, we would uphold the Commissioner's decision on the taxpayer's objection and would confirm the assessment in issue.
Claims disallowed
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