Case W85

Members:
BJ McMahon DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 August 1989.

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B.J. McMahon (Deputy President)

In the year ended 30 June 1985 the applicant spent $12,941 on what he described as ``self education expenses''. The sum comprised return airfares between Australia and the United Kingdom, fees paid to a United Kingdom university and various related sums for accommodation, travel, texts and stationery. There was no issue raised as to whether the amount claimed had in fact been spent or whether it could all be properly classified as self-education expenses. The money was paid in relation to a postgraduate course offered by the university culminating in a degree of Master of Science (Tourism). A course outline attached to the return indicates that there were required classes in international tourism, tourism administration, and the evaluation of tourist facilities. In addition, a candidate for a Master's degree was obliged to prepare a dissertation of approximately 20,000 words on an approved topic under the guidance of an appropriate supervisor.

2. In explanation of the claim the applicant added a note to his return in these words:

``My reasons for returning to full time study and the consequent claim for self education expenses were as follows -

• 1. To improve and enhance my opportunities for advancement in the leisure/recreation/tourism field. This has, in fact, been achieved as I am now employed as a Lecturer in Tourism at [X] Institute of Technology. My salary level has risen accordingly and a letter from my present employer is attached in support of my claim.''

Attached to the claim was a letter from the head of the hospitality and administrative studies department of the [X] Institute of Technology,

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addressed to the Australian Taxation Office which, omitting formal parts, reads as follows:

``[The applicant] was appointed as Lecturer in Tourism at [the institute] on 15 July 1985. [The applicant's] appointment was a direct result of his overseas post-graduate studies in this field, and his background in the leisure and recreation field generally. His salary at present is $28,100.''

3. The claim for deduction was disallowed. This application is brought to review that objection decision. The applicant gave evidence on the hearing.

4. Between 1978 and 1985, he was employed by a city council in the environs of Melbourne as a recreation and leisure officer. His duties included the management and administration of recreation and sporting facilities, community development work and liaison between community groups and the council. He worked particularly with sporting bodies, youth groups and recreation associations. Part of his duties was to organise a festival, which was a major attraction in the area. It involved arranging for the closure of a particular street and organising entertainment and street performances during the weekend festival.

5. Between 1979 and 1984, the applicant undertook a part-time course of study at an institute of technology and acquired a degree of Bachelor of Arts (Leisure Studies). The course was principally involved in a study of the philosophy of leisure and in ways of going about planning and developing leisure facilities. The applicant said that the course amounted to an attempt to understand the concept of leisure.

6. By 1985, the applicant considered that he had reached his optimal level in local government. The only move for his advancement would have been to another and larger council. He was however anxious, as he put it, to ``improve himself''. He was also anxious to earn more money and to move out of what he described as the ``award constraints'' of salaries in local government. He determined to leave the council and in fact retired (according to the superannuation details attached to his return) on or about 7 September 1984. In his evidence, he gave the date of his retirement as the middle of 1985. The group certificate referred to in his return covered the period from 1 July to 7 September 1984. There was no evidence that the applicant was employed by any other organisation than the council or that he was earning any other money between that date and the date on which the self-education expenses were incurred. I can only assume that the applicant must have been mistaken in his evidence. In any event it is clear that by the time the self-education expenses were incurred, the applicant was unemployed.

7. The applicant gave evidence that before leaving his employment, he had made enquiries as to the sort of job he could move into. He also looked for ways of improving his formal education in his field. The course offered at the United Kingdom university appeared to him to be the only suitable one in the world that offered facilities to pursue postgraduate studies along the lines that he envisaged. He saw the undertaking of such a course as a way to provide for himself opportunities in tourism that were better than those provided in local government.

8. After some correspondence which established his undergraduate qualifications, he was accepted for the course and commenced in October 1984. There were approximately 25 students in the course, 12 of them from the United Kingdom. He was unable to say that there was a common thread of occupation among the students, although he thought that most of the U.K. students came from, or worked in, local government.

9. He finished the course in 1985 and returned to Australia in July of that year. He was known to the dean of an institute of technology and was known to be the only Australian who had completed a postgraduate degree in his particular field of study.

10. The applicant says that he did not seek out a lectureship at the institute, but was in fact offered the position because of his reputation and experience. He had never previously been employed as a lecturer. The courses which he taught included introduction to tourism, consumer research and planning and development. All these subjects were similar to those that he had studied at the United Kingdom university, but were of course adjusted to Australian conditions. The salary at which he commenced was some $3,500 per year more than the salary he had been earning at the council.

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11. He continued at the institute until July 1988 when he commenced his present business of a tourism management consultant. On behalf of individual clients, he now conducts regional tourism studies and marketing studies. He has co-authored a book on the subject.

12. In his evidence, the applicant referred to literature in his field and was at pains to emphasise the relationship that exists between tourism and leisure, both being a combination of recreation and business. His object in presenting this evidence was to emphasise that at all relevant times he was within the same vocation or professional calling. The course for which he incurred the expenses under review was (he submitted) simply another opportunity in that field which he pursued. He said that he pursued this opportunity with a clear motive and strategy in order to advance his prospects. He emphasised that in his view he did not change his profession or attempt to get new employment. His argument was that he was in the same profession at all relevant times and that his expenses were simply to enhance his skills within that profession.

13. The claim is made pursuant to sec. 51(1) of the Income Tax Assessment Act 1936. It is always necessary to return to the text of the section, notwithstanding the many glosses which claims of this nature have attracted over the years. The sum claimed by the applicant is deductible only if it falls within the following terms:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions.''

It is common ground between the parties that the second limb has no application, as the applicant was not carrying on a business at the relevant time. The question to be determined therefore is whether the undoubted outgoings were incurred ``in gaining or producing the assessable income''.

14. Almost inevitably, a consideration of claims of this nature will start with a reference to the observations of Dixon C.J. in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 69:

``It is simply a false analogy to treat him in his visit abroad as engaged in the equivalent of the acquisition of something of an enduring nature and therefore capital. You cannot treat an improvement of knowledge in a professional man as the equivalent of the extension of plant in a factory. Unfortunately, skill and knowledge of most arts and sciences are not permanent possessions: they fade and become useless unless the art or the science is constantly pursued or, to change the metaphor, nourished and revived. They do not endure like bricks and mortar.''

15. So far as they go, these observations, coming as they do from a source of high authority, are still apposite. Nevertheless, as Senior Member Roach pointed out in Case W39,
89 ATC 395, they do not mean that a person who incurs expenditure in maintaining or increasing his learning, knowledge, experience and ability in his profession, is entitled to a deduction regardless of whether he gains income by the exercise of that profession or whether the expense is incurred in the course of his income-producing activities. There must always be a sufficient nexus. The same Senior Member observed in Case U186,
87 ATC 1066 at p. 1070:

``If the test was that expenses should be allowed if they were directed to the future derivation of income, the claim might be allowed. But that is not the test. Authority requires that there be a sufficient nexus between the expenditure in question and the assessable income of this taxpayer to satisfy the requirements of the `first limb' of that section that the expenditure should arise `in the course of' deriving the assessable income. It also requires that the expenditure should not be of a capital, private or domestic nature.''

16. The correct approach, and the correct reading of Finn, was re-stated by Connolly J. in
Evans v. F.C. of T. 86 ATC 4901. The task (his Honour held) is to identify the income-earning activity of the taxpayer and then to determine whether the outgoings were incurred in the course of that activity. In that case, the income which the taxpayer hoped to derive as the result of his Ph.D. qualification was the salary of a teacher of history in a university. The expenses incurred in the production of his thesis were not incurred in the course of gaining or producing such income, because at that stage the taxpayer had never held such an appointment.

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17. His Honour was echoing the observations of Menzies J. in
F.C. of T. v. Maddalena 71 ATC 4161 at p. 4163. Dealing with a premature expense claim, his Honour said:

``The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income.''

This observation has been repeated on many occasions and must be taken to be settled law. It has certainly governed the outcome of many applications before this Tribunal and its predecessors. By way of example, I would refer to Case T11,
86 ATC 174; Case G35,
75 ATC 201; Case Q89,
83 ATC 454; Case W39, 89 ATC 395; Case R108,
84 ATC 721; Case Q93,
83 ATC 464 and Case Q108,
83 ATC 557. In Cases Q89 and W39, it should be noted that the applicant was unemployed at the time the education expenses were incurred.

18. Other cases before this Tribunal were cited by the applicant in support of his arguments but are readily distinguishable on their facts. Finn itself concerned a course pursued by a public servant during his long service leave and while he continued to be employed by the same employer. Indeed, part of the expenses claimed in that case relate to a diversion to South America specifically requested by his employer. Similarly, in Cases V74,
88 ATC 529 and V1,
88 ATC 101 (and possibly Case V32,
88 ATC 285 - concerning the lady who had a commitment to music and drama) the education expenses were simply an interlude in a constant career. In principle, there is no distinction between the canoeing expenses in Case V74 for a teacher of outdoor education and the expenses incurred by Mr Finn in the course of his employment.

19. Both can be clearly distinguished from the expenses incurred in the present application. The applicant insisted that he did not have a change of career and operated within the same profession throughout. The general description of that profession as one involved in recreation, leisure and tourism seems to me so wide as to be of little assistance in categorising a job. His duties as a local government officer, executing council policy in a particular field, seem to me quite different from his duties as a lecturer at an institute of technology. They may have a similarity in subjects of concern, but the differences in purpose, duties, freedom and lack of control mark them out as two distinct occupations, even if they are within the one general field. One marked difference alone would distinguish them. It was not necessary to have a postgraduate degree to be a council officer. As his course involved teaching postgraduate students, his postgraduate qualifications were essential (he said) to his engagement as a lecturer. There is a recognisable and close connection between the fields of general dentistry and that of a specialist periodontist that was illustrated and considered in
F.C. of T. v. Highfield 82 ATC 4463, although in that case there was a finding of fact that the expenses (as in Finn) were to enable the applicant to use the knowledge which he obtained in the advancement of his general practice, which he would continue to carry on and expand until circumstances might be favourable for him to take up practice as a specialist. There is no such close connection here between the pre and post expenses jobs.

20. The applicant placed considerable reliance on a decision of the Supreme Court of New South Wales -
F.C. of T. v. Kropp 76 ATC 4406 and a decision of this Tribunal, Case T78,
86 ATC 1094, concerning the barrister who incurred education expenses before commencing practice.

21. So far as Kropp is concerned, the reliance that Waddell J. placed on the ``perceived connection'' approach must now be regarded as suspect, as was pointed out by Ormiston J. in
F.C. of T. v. Klan 85 ATC 4060 at p. 4065. His Honour was there commenting on observations by David Hunt J. in
Martin v. F.C. of T. 83 ATC 4722 at pp. 4724-4725. David Hunt J. in turn re-examined the observations of Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 and came to the conclusion that Menzies J. did not intend to lay down any new or independent test. His Honour concluded that the requirement to show an outgoing to have been incurred ``in or in the course of'' gaining the taxpayer's assessable income and that a finding of a ``perceived connection'' between the outgoing and the assessable income, is not, and was not intended by Menzies J., to be sufficient by itself to justify a deduction. To the extent that the reasoning of Waddell J. is dependent upon the earlier interpretation of the views of Menzies J.,

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it seems to me that the decision in Kropp can no longer be relied upon.

22. It has been criticised by Deputy President Gerber in Case U166,
87 ATC 957 and Senior Member Roach in Case U186, 87 ATC 1066. Both of those decisions also analysed the reasoning in Case T78 upon which the present applicant placed much reliance. I respectfully agree with the views of Deputy President Gerber and Senior Member Roach and consider that the decision in Case T78 should be confined to its own facts.

23. Having regard to the weight of authority, I consider that I am bound to find the expenses incurred by the present applicant came at a point too soon and were not incurred in gaining or producing the assessable income. The objection decision under review is therefore affirmed.