Case W97

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 14 September 1989.

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Purvis J. (Presidential Member)

Generally - the claim and the disallowance

In January 1984 the taxpayer began, and in about December 1984 he completed, a Master of Business Administration Degree course at an institute in Lausanne, Switzerland. He said that it was an implied obligation of his employment in Australia that he avail himself of education opportunities.

The taxpayer had already obtained a degree in civil engineering (with honours) from the University of Adelaide. Prior to his leaving for Switzerland, he was employed in Australia by an Australian subsidiary of a Japanese multinational engineering corporation. He said that although whilst he completed the course, he was on leave without pay from his employer, he did not resign his position with the company in Australia and was told, and so believed, that on his return at the end of the course, he would be able to resume duties, be it that his previous position might not then be available.

On the taxpayer's return to Australia, he did not regain his previous position or one like it, with the Japanese organisation. He did, however, engage in activities of a consulting nature that led to a higher income than he had been receiving before he obtained his MBA.

The taxpayer sought, pursuant to sec. 51(1) of the Income Tax Assessment Act to claim expenditure of $8,473.51 referable to such studies in his return of income for the year

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ended 30 June 1984. In a schedule to such return he stated:

``The taxpayer... is employed by... as a professional civil engineer. As evidenced by the statutory declaration attached, the taxpayer undertook the Master of Business Administration degree at the... during the year. The following expenses were incurred by the taxpayer and are directly and wholly related to the gaining and producing of assessable income, and were not losses or outgoings of capital or of a capital nature, and are therefore allowable deductions under Section 51(1) of the Income Tax Assessment Act, as amended.''

The statutory declaration referred to stated:

``... that for the period 17 December 1983 through to 30 June 1983 [sic 1984] and for the period 1 July 1984 through to 31 December 1984, that is the periods of leave without pay from... I was not engaged in any payed [sic] employment that would incur a taxation liability to the Australian Government.

During these periods, I will be engaged as a student at the...''

The claim so made by the taxpayer was disallowed. The Commissioner says that the course of study pursued by the taxpayer was in a field different to that in which he was previously involved, and at all relevant times, there was not a nexus between the derivation of income as an employee and the expenditure on the course of study.

The notice of objection set forth the grounds relied upon by the taxpayer, namely, that it was a loss or outgoing incurred by the taxpayer in gaining or producing assessable income, and was not a loss or outgoing of a capital, private or domestic nature. He was not at the relevant time carrying on a business. The objection notice particularised the course conducted and stated:

``It should also be kept in mind that the course in question here is the Master of Business Administration degree, which is the most highly regarded post graduate business degree available, and the extremely demanding workload coupled with the highly technical content of this degree make it far removed from those courses which are undertaken purely because the student has some private interest in the subject matter of the course. In my opinion, there is no other course which is more directly related to gaining higher salaries and to classify the Master of Business Administration degree under the broad heading of `Self Education' is an error of judgment.''

There was not an issue as to the money having in fact been spent.

Employment of the applicant

At the time of the hearing, the taxpayer described himself as an investment banker.

It was in August 1980 that he became employed, as a civil engineer, with the Japanese corporation, it then being retained to design and construct a number of power stations in Australia. The company did not manufacture in Australia and the work was generally carried out by subcontractors.

The taxpayer was initially involved in a relatively junior position. In 1981 he was appointed an assistant divisional manager and in 1982/83 a divisional manager, production supply group. He had supervision of several employees and responsibility for approving invoices of subcontractors. A change of government policy led to a necessary alteration in the on-lining of the stations and renegotiation of all subcontracts. The taxpayer was given responsibility with an outside consultant for such renegotiation. He co-managed a dispute with a supplier being involved in the financial aspects as well as the engineering aspects of the claim.

The taxpayer said that by the second half of 1983, he was manager in the engineering division and felt that the level of skills required to handle the work he was being given had ``outpaced his experience and qualifications''. He was working seven days a week in the management of disputes and he was ``coming to the conclusion that he did not have the right level of skills to continue advancing at the same rate''. His duties then entailed the administration and overseeing of a staff of five to seven employees who liaised with about 80 subcontractors in Australia who were manufacturing goods for delivery to the power stations. The coming on stream of six production units was to be extended, and this entailed renegotiating contracts with the subcontractors. He found, he said, it difficult to

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keep pace with the responsibilities he was being asked to assume. Those of similar seniority in the company were also older than he then was. He was the only Australian engineer with the company; the others were Japanese.

The taxpayer acquired the conviction that he needed to ``go off and study to upgrade'' his basic training. He said that the changing nature of his work required that his expertise be improved within areas of responsibility. He did not have the required levels of skill to advance to a more senior position, and his level of competence was dragging ``a bit behind what was required''. The next level above him was that of project manager, and he needed more general business expertise, he said, to obtain this position. He said that he had been moving with the evolution of the project, and that he was an ambitious person. At that time in 1983, with an engineering firm, he could move to the position of assistant project manager, which would give him broader responsibility in the area involved. There was a Japanese person in the position above him at that time, but there was not an assistant project manager. Most of the other people working for the company were ``at the coal face'', and there were, according to the taxpayer, not very many employees involved in management as such.

Leave without pay and the course

The taxpayer decided that a Master of Business Administration course was the appropriate way to go, and in September 1983, he sought enrolment in the institute in Switzerland. He was accepted.

The taxpayer spoke to executives of his employer about his taking time off to do the course, and their providing some financial assistance. Whilst stating that pursuit of the study would be beneficial to the taxpayer, they declined to assist him financially and were loathe ``for me to go, they being short of people''. He did not formally resign, being considered ``on leave without pay''. The taxpayer said that there was nevertheless an understanding that when he returned to Australia, a job would be available for him. They would discuss this on his return to Australia and he would be found a job with the company provided, in a practical sense, there was one available.

He said that he asked the company to maximise the cash payment to him, he not having any other source of money. It was for this reason that he signed the statutory declaration referred to earlier in these reasons. He said that he did before leaving consider the possibility of his not returning to work for the corporation, and he did approach the directors of a few public companies, ``whose sons he knew'', for assistance. To no avail. They were inquiries only. He said that in the 1983/84 financial year, he did not contemplate working in the business of consultancy.

The course commenced in early 1984. The majority of his fellow students were also engineers. The subjects covered were summarised by the applicant as:

• Product control, being an understanding of efficient plant layout, use of machines and stock layout in factories.
• Organisational behaviour, that is, negotiations.
• People management.
• A basic accounting course.
• Strategic analysis, finance marketing and drawing various disciplines together.
• International finance course, short introductory.

The taxpayer said that the course as it eventuated was very much in line with what he had been doing for his employer during 1983. He was, during the time he was away but infrequently, contacted by executives of the Japanese corporation and asked for his advice, assistance or opinion on company matters.

The aftermath

When he returned to Australia, the taxpayer discussed his position with executives of the Japanese corporation. They could not offer him the same position, but did say that an ``undefined task job'' was available for him. In effect, they would, for a time, find things for him to do. Shortly after his return, he met with a Perth businessman who offered him a position ``bringing a new company to operational level''. He was offered a retainer of $1,000 per month together with expenses. He would be responsible for bringing the company together in an operational sense, encompassing, as the taxpayer said, ``the big picture''.

In the taxpayer's return of taxable income for the 1985 financial year, he claimed further

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expenses referable to the degree course. As a postscript to a schedule, he stated:

``As a direct result of the taxpayer completing this Master of Business Administration degree, he was successful in securing a business consultancy appointment with...''

It was further stated in such income tax return, and referable to expenses claimed by him on account of travelling, that:

``During the financial year, the taxpayer commenced a professional activity of business consultancy. The taxpayer was successful in securing a contract with an inventor in Western Australia, and the following expenses were incurred by the taxpayer as a result of his appointment, and are claimed...''

Expenses incurred in the obtaining of assessable income

Section 51(1) of the Income Tax Assessment Act provides:

``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 except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

It is with reference to the first limb of the subsection that the taxpayer claims his expense, that is, in gaining or producing assessable income. It is not in connection with a business that the claim is made, the role of employee being excluded from a business context.

The Commissioner sought findings of fact in relation to the following:

• 1. That the taxpayer resigned his employment on 16 December 1983, this in order to maintain a maximum financial advantage at that time. It was conceded that there was a loose arrangement in relation to re-employment, the terms of which had not been resolved, but this did not negate from the resignation.
• 2. That at all relevant times between 16 December 1983 and 30 June 1984, the taxpayer was not engaged as an employee or carrying on a business.
• 3. That prior to undertaking the Master of Business Administration course, the taxpayer was employed as an engineer by his employer.

It was contended on behalf of the respondent that the course of study undertaken by the applicant opened up a new field of expertise, and did not fall within
F.C. of T. v. Finn (1961) 106 C.L.R. 60. At all relevant times in the present application, the taxpayer was not an employee and the course of study was in a new field.

It was further submitted that the taxpayer undertook the study to open up a new field of employment.
F.C. of T. v. Maddalena 71 ATC 4161 was directly in point with the present application in that the expenses were incurred at a point of time too soon for the derivation of income therefrom. At the time, the taxpayer was not employed. He spent the money but the expenditure did not have anything to do with the income derived in that year. See
F.C. of T. v. Hatchett 71 ATC 4184.

The position occupied by the taxpayer with his employer, even if it be held that he was employed at the time of his study, was such that he had progressed to a stage with the company that he needed to upgrade his basic training and gain expertise in the management field. This again was moving into a new area (Hatchett supra);
F.C. of T. v. Wilkinson 83 ATC 4295). The taxpayer was deviating from his career path. The extra study was not, as in Wilkinson, in aid of progressing along the same career path. (See also
F.C. of T. v. Klan 85 ATC 4060 at p. 4067, Case U186,
87 ATC 1066, and Case W39,
89 ATC 395.)

The taxpayer submitted that he did not resign his employment, and that the declaration made by him was only in aid of his maximising the amount of holiday pay and loading that then could be paid to him. He said that this was organised by the accounts department of his employer, and he did not play any part in the calculation of the amount, all he wanted was the cash. At no time, he said, did his employer terminate his employment, and he was whilst away, on leave without pay and not otherwise. He said that he was during the year called upon infrequently to give his opinion or advice in relation to company matters. The position held

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by him in the company of assistant manager and then manager, responsible for production control and business management, was consistent with the studies that he undertook in Switzerland. Accordingly, he had not, it was submitted, entered into a new field of expertise.

The course of education was in order to improve the prospect of his promotion with the company (Wilkinson (supra)). There was an implied obligation, it was submitted, on his part to improve his expertise from time to time, and the course of study was incidental to his job. He was to avail himself of education opportunities. Completion of the Master of Business Administration course would enable him to better fulfil responsibilities to the company, and by undertaking the course, it was inherently likely that he would be offered work with an increase in salary. Indeed, successful completion of the course did result in his earnings, be it not from the company but from consultancy, being higher in the 1984 year. The respondent answered the latter submission by submitting that the resultant increase in earnings for the year illustrated that there was an entering into a new venture, the consulting business, and as a result of this, the taxpayer improved his financial position.

Decision

It is the opinion of the Tribunal that the course of study undertaken by the taxpayer was in aid of improving his expertise in a management context. It might well have been that by reason of the additional study undertaken by him, and if he had remained with his previous employer, that he would have been advanced to a more senior position and obtained a higher salary.

However, the taxpayer was by profession a civil engineer. The work that he was undertaking for his employer was of an engineering nature and had allied with it certain management responsibilities. The taxpayer sought to move into areas of management expertise, not into areas of engineering expertise of which it might have been said by him he was already proficient. It was the deficiency in the management side of his expertise and ability, the negotiation side of his expertise and ability, the employer contract aspect of his expertise, that he sought to have rectified by his study. The Tribunal considers that what the taxpayer was seeking to do was to move into a different area of employment involvement than was consistent with his being a qualified engineer for which qualification he had initially been employed.

The Tribunal accordingly does not consider that the expenditure by the taxpayer in the relevant year falls within the parameters of sec. 51(1) of the Income Tax Assessment Act. The taxpayer did indeed derive income during the subject financial year but the expenditure by him in connection with the course was not expenditure incurred by him in the gaining of that assessable income. Neither was it expenditure incurred by him in connection with the position that he held prior to his going on leave. It was expenditure incurred by him in the anticipation that on completion of the course, he would have expertise in a field in which he did not previously have expertise, and thereby obtain a position consistent with the new qualifications that he would hold.

Accordingly, the decision under review is affirmed.