Case Q69

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 3 August 1983.

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K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

This reference relates to a claim for expenses incurred during the 1981 year by the taxpayer, a history schoolmaster, in travelling to the United Kingdom. The journey was made by the taxpayer to take up a teaching position and to carry out research associated with the preparation of a thesis required for the completion of a Master of Arts degree.

2. It was the taxpayer's submission that the prime purpose of going abroad was to gain overseas teaching experience which he considered a prerequisite for obtaining promotion within the independent school system as it exists in Australia. He did, at the same time, collate information in the subject of German History which formed the basis of his qualifying thesis. That research was undertaken in Oxford and Cambridge, United Kingdom, and Stuttgart, West Germany, and according to evidence the information so sought was not available in this country.

3. The taxpayer contended that as those activities had, in his opinion, resulted in both promotion and an increase in earnings, the costs of relocation in the United Kingdom were permissible deductions in terms of sec. 51(1) of the Income Tax Assessment Act. The amount so expended was $3,483, and that figure had been claimed as a deduction in the taxpayer's 1981 return. However, the Commissioner took a contrary view and, in disallowing the claim, stated that he considered the outgoings to be of a private nature. Upon the disallowance of the resultant objection, the taxpayer requested that the matter be referred to a Board for review.

4. During the period January 1977 to December 1980, the taxpayer had been engaged by a private school to teach English and Ancient History. He possessed the ambition of progressing to the status of a headmaster, and indicated that overseas teaching experience would be of substantial assistance in that pursuit. It seems that the current headmaster of the school shared the same view and had offered encouragement and advice in the seeking out of an overseas appointment as a head of department. Such a position could, in the opinion of the taxpayer, be regarded as a stepping stone to a headmastership back in Australia. He unsuccessfully applied for several head of department vacancies occurring in the United Kingdom. It appears that there was no shortage of locally qualified aspirants for the positions advertised and that the prospective employers were reluctant to incur the travel expenses of bringing an applicant to Britain for interview.

5. The taxpayer then decided to apply for any available short term postings in the United Kingdom, the intention being that he would teach for two terms and also be better placed to make application for a head of department position in that country. His endeavours were finally rewarded in November 1980, when he was engaged to teach English and History at a private school in Wales, the commencement date being early January 1981. He thereupon resigned from his employment and proceeded forthwith to Wales, accompanied by his wife and infant son. The taxpayer's plan at that stage was to spend four to five years teaching overseas and also to successfully complete his thesis, which in turn would lead to a higher academic qualification.

6. The details of the expenses relating to the removal of the taxpayer and his family were as follows:

                                                  $
      Air fares............................... 2,467.50
      Accommodation:
          Singapore...........................   324.00
          London..............................   240.00
      Rail fares - London to Wales............    74.00
      Luggage freight.........................   378.00
                                              ---------
                                              $3,483.50
                                              ---------
      

7. The taxpayer, who held a Bachelor of Arts degree, was studying for a Master of Arts degree at the time of departure from Australia. He had completed the course work subjects and had carried out some preliminary research on his qualifying thesis.

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ATC 351

That project was finalised whilst abroad and he was awarded the degree having achieved first-class honours.

8. Upon arrival in Wales, the taxpayer encountered problems in obtaining a work permit from the relevant U.K. Government Authority. He was advised that Australians were classified as aliens and that such a permit would only be granted where it could be established that a job vacancy was not capable of being filled by a citizen of an E.E.C. country. However, after a delay of some months, the taxpayer was issued with a permit for the position at the school in Wales and he officially commenced his duties on 1st May 1981. It seems that because of the remoteness of the school, the taxpayer was the only suitable applicant and that was largely the reason for the issue of the permit.

9. During the next six months, the taxpayer applied for approximately 20 positions as head of history in English schools but on every occasion was denied the opportunity because of the continuing problems associated with the procurement of a work permit. Those constraints finally convinced the taxpayer that further advancement in England was out of the question and that he should seek reemployment in Australia. He then made application for three head of history positions in Australia and was the selected person for all such positions. He terminated his services at the school in Wales on 15th December 1981, and returned to his country of origin to take up an appointment as head of history at an independent school. We accept the fact that the new position constituted a promotion and that an increase in salary resulted.

10. The taxpayer, to succeed, must bring his claim under the provisions contained in sec. 51(1) and in particular the first limb, recognising that the definition of business in sec. 6 excludes his occupation as an employee and therefore the application of the second limb of that section. The first limb states that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable 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.

11. The deductibility of overseas travel expenses incurred by an employee was the subject matter before the High Court in
F.C. of T. v. Finn (1961) 106 C.L.R. 60. The taxpayer, a senior design architect employed by the Public Works Department of Western Australia, used his long service and accumulated recreation leave to tour Great Britain and the Continent for the express purpose of updating his knowledge on current architectural trends and bettering his prospects for future promotion. At the request of his employer, he included in his itinerary a visit to South America with the employer paying the additional costs resulting from that extension. It was held, having regard to the particular facts, that, as those expenses had been incurred in accordance with the conditions of his service, a deduction was allowable in terms of sec. 51(1). It is appropriate, in considering the present matter, to record the comments of Windeyer J. at p. 70:

``Each case of this sort must depend on its own facts. The facts and considerations relevant in this case appear fully in the judgment of the Chief Justice. Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incures 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. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion. Moreover, it would surely be wrong to assume that the Crown is so indifferent to the professional attainments of those whom it employs that their rights and prospects in its service are not affected by the true measure of those attainments. That was not so in this case. Outgoings incurred for the genuine purpose of acquiring or maintaining knowledge and skill in a vocation do not become an outgoing `of a private nature' simply because the taxpayer got pleasure and satisfaction in increasing his knowledge and attainments.''

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ATC 352

12. The question of self-education expenses incurred by a teacher was considered by the High Court in
F.C. of T. v. Hatchett, 71 ATC 4184. The taxpayer had expended funds in the completion of a thesis submitted for a Teacher's Higher Certificate and also university enrolment fees for subjects in the Faculty of Art. The possession of the Higher Certificate resulted in an immediate increase in salary. It was held that there was, on the evidence, a clear connection between the obtaining of the higher qualification and the taxpayer's future assessable income, and thus the expenditure associated with the preparation of the thesis was a permissible deduction under the provisions of sec. 51(1). As Menzies J. said in his judgment at p. 4186:

``The taxpayer, in reliance upon the conditions of his employment, spent money to earn more. In these circumstances the outgoings necessary to obtain the certificate ought, I think, to be regarded as outgoings incurred in gaining assessable income.''

On the other hand, having regard to the taxpayer's lack of success in passing the university examinations, it was impossible to find affirmatively any connection between the payment of enrolment fees and the derivation of assessable income at any time in the future, and therefore no deduction was available for that outgoing. The relationship between the taxpayer's assessable income and the payment of the fees was too problematical and remote.

13. We also refer to the judgment of the Supreme Court of New South Wales in the case of
F.C. of T. v. Smith, 78 ATC 4157. In that matter the taxpayer, a clerk employed in the Taxation Office, applied for acceptance in an assessing school. The application was refused as he was not studying an approved course at tertiary level. The taxpayer accordingly commenced a Bachelor of Commerce course and was subsequently admitted to the assessing school and later elevated to the position of Assessor Grade 1, Class 2/3. It appears that that appointment was not strictly a promotion although he was placed permanently on the Class 2/3 level and was put in a position from which, subject to satisfactory performance of his duties, and to meeting the degree qualification requirement applying for Assessor Grade 5, he could move up through the assessing grades. It was held that the taxpayer was entitled to claim various study expenses in excess of $400, being the maximum prescribed as deductible for self-education expenses pursuant to sec. 82JAA, under sec. 51(1) of the Act. The following statement of Waddell J. at pp. 4161-4162 is noteworthy:

``The appointment of the taxpayer as an assessor confirmed the salary range in which he then was and, subject to his continuing his course of study and performing his duties satisfactorily, gave him a reasonably certain assurance of promotion in rank and advancement in salary. There is no suggestion that the taxpayer lacked the capacity or diligence to complete the course.

In my opinion these circumstances establish a real connection between the expenditure and the taxpayer's assessable income in the sense that the commencement of the course was reasonably calculated to lead to an increase in his income in future years for the reasons already given, that it had in fact led to the confirmation of his salary range by his appointment as Assessor, Grade 2, and his continuation with the course had, during the year of income, led to an increase in his salary namely upon his appointment as Acting Assessor, Grade 3 on 26th February 1973, and was reasonably calculated to lead to future increases, as in fact occurred. In short, in incurring the expenditures in question the taxpayer, in reliance upon the prospects of promotion which appeared reasonably to be present, spent money to earn more in the future.''

14. However, in the present issue, the decisions previously mentioned should be approached with some caution in recognition that the expenditure under review cannot be said to have been incurred in like circumstances. In the instant case, the outgoings occurred at a time when the taxpayer was not employed and were made in the process of carrying out a plan to equip him with the ability to earn an increased salary in the future by acquiring overseas experience and a higher qualification.

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ATC 353

15. A similar type situation arose in
F.C. of T. v. Kropp, 76 ATC 4406, which was decided by the Supreme Court of New South Wales in favour of the taxpayer. In that case a chartered accountant resigned from his employment with an Australian firm of accountants and went to work in Canada for two years with an affiliated but autonomous firm. He was then re-employed by the Australian practice with a promotion and an increase in salary. It was found that the cost of the taxpayer's air fare to Canada was part of a plan formulated to increase his income from his employment as an accountant by the acquisition of overseas experience, at the conclusion of which it could be anticipated with considerable confidence that he would be re-engaged in Australia at an increased salary and that the rate of increase in earnings for the remainder of his professional life would be accelerated. Those considerations provided, in the opinion of the Court, the necessary perceived connection between the outgoing and the assessable income. The comments of Waddell J. at p. 4410 on the question of that connection are of interest:

• ``In these circumstances'' (i.e. where expenditure was made in the course of carrying out a plan to increase income) ``in order to qualify as an allowable deduction there must be seen to be what Menzies J. called in Hatchett's case `a perceived connection between the outgoing and assessable income' (71 ATC 4184 at p. 4187; 125 C.L.R. 494 at p. 499). The connection need not, of course, be between the outgoing and assessable income of the year in which the outgoing was incurred: Finn's case, above, per Dixon C.J. at p. 68; Hatchett's case, above, at ATC p. 4186; C.L.R. p. 498. Whether there is such a perceived connection in any particular case is a matter of judgment informed by the criteria established by the cases.''

The learned Judge, in reaching a decision as to the existence of such a perceived connection, relied upon the fact that the taxpayer upon his return from overseas was promoted and given an increased salary only as a subsequent event, confirming that the plan when put into operation was reasonably calculated to achieve its object.

16. The Commissioner submitted, as an ancillary argument in the present case, that the expenditure in respect of the spouse and child did in no way relate to the gaining of the taxpayer's assessable income and, to that extent, no deduction was permitted by sec. 51(1). Furthermore, if apportionment were appropriate, no amount greater than one-half of the total outgoings should be allowed. The taxpayer, in his final address, accepted those assertions and therefore the amount of the claim requiring our decision was reduced to a figure of $1,742.

17. It is our view, having regard to the evidence adduced and the credibility of the taxpayer, that the expenditure was part of a plan designed by the taxpayer to increase his income as a teacher by the acquisition of overseas experience in conjunction with the obtaining of a higher degree, at the conclusion of which it could have been anticipated with considerable confidence that he would be employed upon his return to Australia at an increased salary. The taxpayer, at the time of incurring the outgoings, intended to further his teaching career. He did not depart from that intention, notwithstanding the need in the U.K. to modify the strategy because of circumstances beyond his control.

18. Those considerations provide, to our mind, the necessary perceived connection between the outgoing and assessable income. We conclude that the expenditure was incurred in the gaining of the taxpayer's assessable income and that the amount of $1,742 is an allowable deduction in terms of sec. 51(1). The fact that the taxpayer, upon his return, occupied a higher position with a resultant increase in earnings confirms that the plan was reasonably calculated to achieve its object.

19. For the reasons detailed above, we direct that the assessment before us be amended to allow a deduction of $1,742.

Claim allowed in part