THOMAS v FC of T
Members:SE Frost DP
Tribunal:
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
[2015] AATA 687
SE Frost (Deputy President)
INTRODUCTION
1. The Commissioner of Taxation disallowed a number of deduction claims made by Mr Thomas in his income tax return for the year ended 30 June 2013.
2. All the disallowed claims relate to a course which Mr Thomas undertook in Paris leading to the award of the degree of Master of Business Administration (MBA). Mr Thomas claims that he is entitled to the deductions as losses or outgoings incurred in gaining or producing his assessable income. That is the straightforward question posed by s 8-1(1)(a) of the Income Tax Assessment Act 1997 (the ITAA 1997). Depending on the answer to that question, there is also the question whether administrative penalty is payable by Mr Thomas.
FACTUAL BACKGROUND
3. In April 2010 Mr Thomas secured employment as an Associate Director in National Australia Bank's private equity investment team. His responsibilities included originating, evaluating, structuring and negotiating investments in private companies across Australia.
4. After about 18 months in the role, Mr Thomas decided to undertake further study. He chose to do an MBA, and embarked upon an extensive evaluation of the many international courses that might meet his requirements. He eventually decided to aim for admission to the course offered by the prestigious Ecole des Hautes Etudes Commerciales de Paris (HEC Paris). He undertook the Graduate Management Admission Test, or GMAT, in May 2012 and then applied to, and was accepted by, HEC Paris in July 2012. The course would start in January 2013.
5. NAB seems to have been generally supportive of Mr Thomas' desire to undertake the course full-time, even though it would take him out of their workforce for 16 months. However, before he could make a formal application for leave, Mr Thomas and several other members of the private equity team were made redundant on 16 November 2012. The section was ultimately closed down. After his redundancy Mr Thomas did not earn any salary or wages for the remainder of the 2013 income year, or at all during the 2014 income year.
6. By the time he was made redundant, Mr Thomas had paid for his flight to Paris and he had also paid for a visa enabling him to do the course. Although Mr Thomas' deduction
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claims for these items of expenditure were initially disallowed, the Commissioner now accepts that they are allowable deductions.7. But it is the course fees that represent the main part of the dispute. Before being made redundant, Mr Thomas had actually paid the first instalment of the course fees, amounting to $7,432.54. The Commissioner now accepts that amount is deductible. But he does not accept the second and third instalments, amounting to $30,137.50 and $8,096.07 respectively. The second instalment was paid on 28 November 2012 and the third payment was due in March 2013 and paid during the 2013 income year.
8. The Commissioner says that because the second and third instalments were not only paid, but more importantly incurred, at a time after Mr Thomas was made redundant, the necessary nexus between the incurring of the outgoing and Mr Thomas' gaining or producing assessable income had been broken. Mr Thomas, on the other hand, says that although the second and third instalments were paid after he left NAB, he had actually committed to them before he was made redundant, and so he incurred the expenses while he was still employed. Alternatively, he submits, even if they were not incurred until they were paid, there is still the required nexus with the gaining or production of assessable income. On either basis the amounts should be deductible.
THE COMMITMENT TO PAY THE COURSE FEES
9. Mr Thomas was represented at the hearing by his father, Mr Jack Thomas, to whom I will refer as Mr Thomas Senior. Mr Thomas Senior is a registered tax agent.
10. Mr Thomas Senior told me that, before undertaking the course, his son had had to sign a "Payment Agreement" with HEC Paris, accepting his liability to pay the course fees. He also told me that he himself, the father, had signed a "Guarantor's Contract" guaranteeing the payment of those fees.
11. The Tribunal documents include, at T4-33 to T4-38, proforma documents of the kind issued by HEC Paris to students undertaking their courses but the copies of the documents lodged with the Tribunal were not signed by either Mr Thomas or his father. Although Mr Thomas Senior insisted that he had signed a guarantee document, he had not been able to produce it on the day of the hearing. A short time after I reserved my decision, Mr Thomas Senior approached the Tribunal with a request to reopen the hearing since his son had now located the documents that he and his father had signed on 14 November 2012. The Commissioner opposed the application to reopen. On 28 May 2015, I conducted a directions hearing to hear from the parties on the application to reopen. I told the parties at the conclusion of that hearing that I would reserve my decision on whether leave should be granted to reopen and that I would include my ruling in these final reasons for decision. In the interests of justice I now grant leave to reopen, with the result that I will take into account the signed documents produced to the Tribunal on 25 May 2015.
12. One of those documents, styled Payment Conditions, provides the following information under the heading Payment Schedule:
For the academic year 2013/2014, the MBA tuition fees are set at €48,000 (forty eight thousand Euros) + €110 (one hundred and ten Euros) for sports subscription.
- > Non-refundable pre-enrolment down payment : 6,000 €
- > 1stpayment by December 3rd, 2012 at the latest : 24,110 €
- > 2ndpayment by March, 2013 : 18,000 €
- > Scholarships are deducted from the 2ndinstalment
13. A Payment Agreement, signed by Mr Thomas on 14 November 2012 (two days before he was made redundant by NAB), includes the following declaration made by Mr Thomas:
I declare that I am aware of the HEC-MBA tuition fees, which amount to €48,000 (forty-eight thousand Euros) payable in 3 instalments (a first €6,000 non refundable pre-enrolment down payment, €24,000 payable by December 3rd, 2012 at the latest, €18,000 payable by March, 2013), and commit to paying them.
14.
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By the terms of the Guarantor's Contract, signed by Mr Thomas Senior also on 14 November 2012, Mr Thomas Senior declared:… that I have read the payment commitment and that I am aware of the tuition fees payment terms signed on 14 November 2012 by Mark Thomas and hereby accept to act as joint guarantor for the amounts and under the conditions specified below.
15. The Guarantor's Contract also required him to, and he did, write out the following statements by hand:
By acting as guarantor for Mark Thomas for the sum of €42,000.00 forty-two thousand euros to cover the payment for the principal, all interest and if necessary any penalties for late payment, for a duration of 8 years I hereby commit to paying all due sums to CCIP-GROUPE HEC from my own income and assets if Mark Thomas is not able to do so himself.
In relinquishing the benefit of discussion as defined in article 2298 of the Civil Code and by committing jointly with Mark Thomas I hereby engage to settle the debt to the creditor - the Paris Chamber of Commerce and Industry - without being able to request that the creditor first claim payment from Mark Thomas.
INCURRING A LOSS OR OUTGOING
16. A loss or outgoing can be "incurred" by a taxpayer even if money has not yet been paid out.
17. In
W Nevill and Company Limited v Federal Commissioner of Taxation (1937) 56 CLR 290; [1937] HCA 9 the High Court considered the deductibility of expenditure under s 23 of the then Income Tax Assessment Act 1922, which was relevantly identical to the current s 8-1(1)(a). Latham CJ said at 302:
… the word used [in the Act] is 'incurred' and not 'made' or 'paid'. The language lends colour to the suggestion that, if a liability to pay money as an outgoing comes into existence, the quoted words of the section are satisfied even though the liability has not been actually discharged at the relevant time … [i]t is only the incurring of the outgoing that must be actual; the section does not say in terms that there must be an actual outgoing - a payment out.
18. Cases dealing with the meaning of the word "incurred" in s 51(1) of the Income Tax Assessment Act 1936 (the ITAA 1936), the immediate predecessor to s 8-1 in the ITAA 1997, have referred to the requirement that there be a "presently existing liability"[1]
19. When were the second and third instalments incurred?
20. Mr Thomas says both amounts were incurred on 14 November 2012, when he signed the Payment Agreement and his father signed the Guarantor's Contract. He relies on the terms used in those documents, which say that each of the men, on that day, "commit[ted] to paying" the course fees.
21. The Commissioner also points to the terms used in the documents, particularly the Payment Agreement. He highlights the fact that the first instalment is described as "non-refundable" but the second and third are not.
22. If it were clear from the documents - and the documents are all I have to go by - that the second and third instalments, or either of them, had to be paid even if Mr Thomas changed his mind and withdrew from the course, then I would agree with Mr Thomas' submission that he incurred those amounts on 14 November 2012. But it is not clear that that is the position.
23. No doubt the description of the first instalment as "non-refundable" flagged to the prospective students that once that payment was made, there was no prospect of getting the money back. In effect, the first instalment secured the student's position in the course, but if for any reason the position were not taken up, the money would still stay with HEC Paris.
24. But the second and third instalments are not described in the same way. What would the position have been if, say, Mr Thomas had decided not to go ahead with the course? What if he had withdrawn before the due date for payment of the second instalment, 3 December 2012? Would HEC Paris have been entitled to
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recover the fee from him and his father? Or, if he had paid the second instalment by the due date but then changed his mind before the start of the course in January 2013? Would HEC Paris have refunded that instalment? Or would it have kept that instalment, and insisted on the payment of the third?25. The answers to those questions are relevant to the question whether Mr Thomas was "definitively committed", on 14 November 2012, to the second and third instalment amounts. Unfortunately I do not have answers to those questions. It is not clear to me that the "commitment" the men were making was anything more than a commitment to pay the fees if Mr Thomas went ahead with his study. I am not satisfied, as I need to be, that they were committed to paying the fees no matter what.
26. On the material before me, I am not satisfied that Mr Thomas incurred those amounts on 14 November 2012, rather than when he actually paid them. In other words, I am not satisfied that those amounts were incurred while he was still employed with NAB.
ARE THE SECOND AND THIRD INSTALMENTS DEDUCTIBLE?
27. The phrase "incurred in gaining or producing" your assessable income has been construed to mean "incurred in the course of gaining or producing" your income:
Amalgamated Zinc (De Bavay's) Limited v Federal Commissioner of Taxation [1935] HCA 81; W Nevill and Company;
Ronpibon Tin NL v Federal Commissioner of Taxation [1949] HCA 15;
Commissioner of Taxation v Cooper [1991] FCA 164.
28. The "assessable income" referred to in s 8-1(1)(a) is not restricted to the assessable income you gain or produce in the income year in which the loss or outgoing is concerned: Amalgamated Zinc; Ronpibon Tin;
Federal Commissioner of Taxation v Finn [1961] HCA 61;
Fletcher v Federal Commissioner of Taxation [1991] HCA 42.
29. I think it is very likely that if Mr Thomas had remained in employment with NAB, and had incurred the expenditure on the MBA course while he remained an employee, there would have been no dispute about the deductibility of the expenditure: the factors referred to by Dixon CJ in Finn's case would all seem to be present in that hypothetical scenario. Those factors are:
- • that the increased knowledge obtained from the course would have made advancement in his job more likely;
- • that advancement in his job formed a real and substantial element in the motive for doing the course;
- • the employer would likely have regarded his increased knowledge to be a distinct advantage to his work; and
- • the course would have been done while he was in NAB's employment, earning his salary and acting in accordance with the conditions (or perhaps more generously, the expectations) of his service.
30. But, having failed to establish that he incurred the disputed amounts before his employment ceased, Mr Thomas is unable to show that the outgoing was incurred in the course of gaining or producing his assessable income, which, according to the authorities, he is required to show.
31. Mr Thomas' case is somewhat similar to that of the taxpayer in
Commissioner of Taxation v Roberts [1992] FCA 586; (1992) 39 FCR 118. There, the taxpayer, a mining engineer, was retrenched shortly before commencing his MBA. Before being retrenched, he was negotiating with another mining company with a view to gaining employment. That company indicated there may be an opportunity in the future where completion of an MBA would be desirable. While the negotiations did not result in a job offer at that time, the taxpayer was offered a job at that company later, just before completing his MBA.
32. The Federal Court (Cooper J) disallowed the deductions relating to the MBA course. His Honour found that the expenditure was spent to obtain new employment, rather than being incurred in the course of earning his employment income.
33. The facts in Mr Thomas' case are different, in that he did not incur the MBA fees for the purpose of securing a particular alternative employment posting, or
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indeed any employment at all. Nevertheless, I agree with the Commissioner's submission that, as occurred with the taxpayer in Roberts, the nexus with any income-generating activity was lost once his employment with NAB ceased. It does not matter that Mr Thomas accepted the position in the MBA course while he was still employed. What matters is that he did not incur the expenditure while he was employed. It is for that reason that he cannot have incurred the expenditure "in gaining or producing" his assessable income.ADMINISTRATIVE PENALTY
34. Penalty was assessed at 25 per cent for failure to take reasonable care: s 284-75(1) and table item 3 in s 284-90(1) in Schedule 1 to the Taxation Administration Act 1953 (the TAA).
35. Mr Thomas' tax return for 2013 was lodged on 3 February 2014 (Exhibit R2). Mr Thomas explained that the usual arrangement with the lodgement of his tax returns was for him to "put together the numbers" and send them to his father who "checks and puts them in the right categories" (Transcript, page 27). It was in accordance with this usual arrangement that Mr Thomas Senior, a registered tax agent, submitted his son's return for 2013 and showed his own tax agent registration number in the section "Tax Agent's Details".
36. On the day before lodging the return, Mr Thomas Senior wrote a note of the matters he took into account to support the deduction claim for the expenditure relating to the HEC Paris course. The note was marked as Exhibit A2. In its entirety it says:
Self education expenses
TR 98/9
FC of T v Finn (1961) 106 CLR 60
FC of T v Hatchett (1971) 2 ATR 557
FC of T v Studdert (1991) 22 ATR 762s. 82A
Southwell-Keely and FCT (2008) 73 ATR 239
Re Amuthalan and FCT (2008) AATA 818
FCT v Highfield (1982) 13 ATRdentist allowed dedn for obtaining a specialist degree overseas.
Re Davis and FCT (2000) 44 ATR 1109(costs of Bachelor of Social Science (Human Services) incurred by a Health Insurance Commission claims review officer deductible).
Re Maclean and FCT (2001) 48 ATR 1160(costs of Masters course in adult education incurred by a nurse deductible)
The cost of tertiary studies will not be deductible if the studies are undertaken so that the taxpayer can pursue a new career or obtaining new employment
FCT v Roberts (1992) 24 ATR 479 where a mining engineer was refused a deduction for the cost of obtaining MBA in the USA.
FCT v Roberts 92 ATC 4787 found against taxpayer can be distinguished in that the taxpayer was unemployed. Mark was. Consulted Colin on 30.1.14 he agrees S/B allowed.
37. In summary, Mr Thomas submits that he (and his tax agent father) did not fail to take reasonable care, but even if they did, the "safe harbour" provision in s 284-75(6) applies. That subsection reads as follows:
You are not liable to an administrative penalty under subsection (1) or (4) if:
- (a) you engage a *registered tax agent or BAS agent; and
- (b) you give the registered tax agent or BAS agent all relevant taxation information; and
- (c) the registered tax agent or BAS agent makes the statement; and
- (d) the false or misleading nature of the statement did not result from:
- (i) intentional disregard by the registered tax agent or BAS agent of a *taxation law (other than the *Excise Acts); or
- (ii) recklessness by the agent as to the operation of a taxation law (other than the Excise Acts).
38. Subsection (7) provides:
If you wish to rely on subsection (6), you bear an evidential burden in relation to paragraph (6)(b).
39. I accept, on the basis of Mr Thomas Senior's handwritten note, that he gave proper, albeit brief, consideration to the relevant
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issues. He specifically wrote down, in the context of the decision in Roberts, the decisive factor in that case - that the taxpayer was unemployed.40. I also find that he concluded that his son's case was distinguishable from Roberts because, he concluded, his son was employed when the expenditure was incurred. In context, that is the thrust of the notation "Mark was".
41. That conclusion was wrong, but it was based on his view - repeated in the hearing - that because he and his son signed the HEC Paris documents before Mr Thomas was made redundant, Mr Thomas was definitively committed to the expenditure while he was still employed. That was hardly an unreasonable view, even if it was wrong.
42. Not every wrong judgement call is the result of a failure to take reasonable care. I am satisfied in this case that Mr Thomas took reasonable care by asking his father, a registered tax agent, for advice on whether the expenditure was deductible. I am also satisfied that Mr Thomas Senior took reasonable care in considering that question in the way reflected in the handwritten note, even though he came to an answer that I think is wrong.
43. Table item 3 in s 284-90(1) in Schedule 1 to the TAA is not engaged. As a result, the administrative penalty falls away.
44. If I am wrong with that, I consider that the "safe harbour" provision in s 284-75(6) applies.
45. I raised with the parties during the hearing as to whether, in a case such as this, Mr Thomas can be seen as having "engaged" a registered tax agent by asking his father to help him with his return. It seemed to me that the word "engage" may be suggestive of a more formal, professional relationship between the taxpayer and the tax agent than the relationship of father and son, particularly where the arrangement does not include the payment of a fee. However, in circumstances where, as here, the tax agent notifies the Commissioner on the tax return that he is the tax agent for the taxpayer, it is proper to regard the agent as having been "engaged" by the taxpayer.
46. There is no dispute that paragraphs (c) and (d) of s 284-75(6) apply. The real question is whether, in terms of paragraph (b), Mr Thomas gave his father "all relevant taxation information". The answer to that must be yes. It is clear that Mr Thomas Senior was fully apprised of his son's arrangement with HEC Paris - he was, after all, guaranteeing the payment of the fees - and of NAB's having made his son redundant. They are the items of information that are relevant.
CONCLUSION
47. With the exception of the concessions made by the Commissioner before and during the hearing, and as reflected in paragraph 7 of the Commissioner's written submissions and at pages 10 and 11 of the transcript, the objection decision relating to the assessment of primary tax is affirmed.
48. The objection decision relating to the assessment of administrative penalty is set aside. Instead the Tribunal allows the objection in full.
Footnotes
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